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CONTENT Chapter I Introduction Need for the study Objectives of the study Methodology

Limitations
Chapter II Industry Profile Stock markets in India

Financial Markets Money Markets Capital Markets Stock Markets


Derivative Markets Chapter -III Steel city securities Limited profile.

About the organization Organization structure Activities of SCSL Registration steps Chapter - IV
Chapter -V Securities Ltd. Chapter - VI ANNEXURE Summary and Suggestions. Bibliography

Theoretical framework of derivative market.


Practical aspects of derivative market in Steel City

Chapter 1

Overview
Introduction Need for the study Objectives of the study Methodology Limitations

INTRODUCTION
India can boast of being one of the oldest stock markets in Asia. Earlier in the initial days trading in securities was done in a Very informal or Unsystematic manner Company agents or representatives representing different corporate Companies, already listed in the Stock Exchange. These representatives has to openly outcry the necessary details about the company and give a brief description of the number of shares allotted to issue and their quoted prices. After this the bidding process takes Place. This system was lacking the information technology for immediate matching or recording of trades. This was time consuming and inefficient. In order to provide efficiency, liquidity and transparency, NSE(National Stock Exchange) introduced a nation wide online fully automated screen based trading system(SBTS) where a member can punch into the computer Quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds matching sell or buy orders from a Counter party. Today India can boast that almost 100% trading takes place through Electronic order matching. NSE has main computer which is connected through Very Small Aperture Terminal (VSAT) installed at its office. Brokers have terminals (identified as PCs) installed at their premises which are connected through VSATS/ Leased Lines/ Modems. With the emergence of online trading in Indian Stock Exchanges the volume of the securities traded, the size of the market and the market turnover has increased tremendously. This accounts for about 2/3rd of the National Income of the Economy.

DERIVATIVES MARKET IN INDIA

Derivatives products initially emerged as hedging devices against fluctuations in underlying asset. In recent years the market for financial derivatives has grown tremendously in terms of variety of instruments available and it marks by a very high volatility. Futures and options on stock indices have gained more popularity than on individual stocks. Through the use of derivatives products it is possible to partially (or) fully transfer price risks by locking in asset prices. NEED FOR THE STUDY

Performance Evaluation makes the reader understand about the performance of the particular scrips since last 2months.

My study can make the investor understand various operations done in Stock Exchange.

This gives them a clear idea about the performance of the scrips and how and where to invest.

After going through my study the reader can be very well benefited by not only knowing about Stock Exchange but also its operation, various guidelines and by learning the performance on scrips.

OBJECTIVES To study various operations of various Stock Exchange in India.

To study the fluctuations of selected scrips that is traded regularly in NSE and suggestions given.

To study the derivatives trading in the Indian Capital Market. To study the Futures and forwards contract in the derivative markets.

To study the factors which determine or influence the Option price.

To study about Futures and Options as a hedging tools. To study clearing and Settlement procedure of Futures and Options.

To study the payoff for Future and Options in the long and short run.

METHODOLOGY The study was under taken in the trading floor of SCSL. The Information regarding the online trading is collected from both primary as well as secondary sources of data. Primary data Watching the online trading live. Interacting with the operators at the computer terminals the clients trading in SCSL.

Collecting information from the head of each department and from the staff working in those departments.

Secondary data Collecting the data from the website of NSE.

Referring the topics in textbooks and journals relating to stock exchange operations. Collecting information through internet and also from Steel City Securities Limited.

LIMITATIONS

As the subject chosen comparatively new one, the study suffers from certain limitations. 1. Stock Exchange is an ocean and study is an attempt to understand which a drop in the ocean. The activities in stock exchange and derivatives market are vast and to understand all the activities is a difficult task, as there are only few persons who can provide information. 2. To know the entire activities of stock exchange is very difficult as it takes a long period to understand. 3. Though the system, people and time were there, some information regarding certain topics in stock trading was not collected due to non availability of time to the key persons from their busy schedule. 4. Because of the comprehensive nature of some information is not disclosed though sources of information are available.

Chapter 2

Overview
Industry Profile Stock markets in India

Financial Markets Money Markets Capital Markets Stock Markets


Derivative Markets

INTRODUCTION TO FINANCIAL MARKETS

Finance is the integral part of modern business. Financial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types, such as currency cheques, bank deposits bills, etc. The main functions of the financial markets are: (i) To facilitate creation and allocation of credit and liquidity (ii) To serve as intermediaries for mobilization of savings; (iii) To assist the process of balanced economic growth; (iv) To provide financial convenience; (v) To cater to the various credits needs of the business houses.

TYPES OF FINANCIAL MARKETS: Based on credit requirement for short-term and long-term purposes, financial markets are divided into two categories: 1. Money Market 2. Capital Market

Financial Management

Financial institutions

Financial Markets

Financial Instruments

Financial Services

Money Market

Capital Market

Organized

Unorganized

Stock Market Gift edged Securities market

Term Lending Institutions Industrial securities market Primary market Secondary market Stock Exchange

NSE

BSE

OTCEI

OTHERS

Wholesale debt market segment

Capital Market Segment

Cash Segment

Derivative segment Interest Rate Put

Future

Option

Stock

Index

Call

STOCK EXCHANGES IN INDIA


At the end of the June 1989, there were 18 recognized stock exchanges in India. Among the 18 stock exchanges, the first organized stock exchange set up at Bombay in 1857 is distinguished not only by its size but also it has been recognized permanently, while the recognition for other markets is renewed every 5 years. Stock markets are organized either as voluntary, non-profit making associations (Bombay, Ahmedabad, Indore) or public limited companies (Calcutta, Delhi, Bangalore) or company limited by guarantee (Madras, Hyderabad). In India, the growth of stock exchanges has been linked to the growth of corporate sector. Though a number of stock exchanges were set up before independence but, there was no All India legislation to regulate theyre working. Every stock exchange followed its own methods of working .To rectify this situation, the SECURITY CONTRACTS (REGULATIONS) ACT was passed in 1956. In 1965, 22 separate provincial stock exchanges were merged into 3 regional stock exchanges and in 1973 these, in turn, were combined to form the National Stock Exchange (NSE) under the title of the stock exchange that has trading floors in many former provincial center. At present, there are 26 stock exchanges in our country. The over-the counter exchange of India began its operations in 1992. Since 1995, trading in securities is screen based (on-line) BOMBAY STOCK EXCHANGE (BSE): Bombay stock exchange is the first organized stock exchange set up at Bombay in 1857. It is the premier or apex stock exchange in India as it is distinguished not only by its size but also it has been recognized permanently while recognition of other stock exchanges is renewed every 5 years. It is the oldest stock market.
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Bombay Stock Exchange raised the threshold limit for listing to Rs.10 crores, moved on to weekly settlement and quicker actions for each settlement. Settlement is through the clearinghouse. 12 days carry forward is allowed on BSE. Index in BSE is SENSEX. BSE membership fee in 1857 was just Rs1lakh and now it in about Rs 2crores. NATIONAL STOCK EXCHANGE (NSE) National Stock Exchange of India Ltd was started in 1992 with a paidup equity of Rs.25 crores. The government recognized it in the same year and NSE started its operations in wholesale in Nov 1994.

NSE MISSION
NSE mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of:

establishing a nation-wide trading facility for equities, debt instruments and hybrids,

ensuring equal access to investors all over the country through an appropriate communication network, providing a fair, efficient and transparent securities market to investors using electronic trading systems, enabling shorter settlement cycles and book entry settlements systems, and

meeting the current international standards of securities markets.

NSE LOGO

The logo of the NSE symbolizes a single nationwide securities trading facility ensuring equal and fair access to investors, trading members and issuers all over the
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country. The initials of the Exchange viz., N, S and E have been etched on the logo and are distinctly visible. The logo symbolizes use of state of the art information technology and satellite connectivity to bring about the change within the securities industry. The logo symbolizes vibrancy and unleashing of creative energy to constantly bring about change through innovation.
NSE GROUP

NSCCL

NCCL

NSETECH

DotEx Intl. Ltd. IISL NSE.IT

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NSE Milestones
November 1992 April 1993 May 1993 June 1994 November 1994 March 1995 April 1995 June 1995 July 1995 October 1995 April 1996 April 1996 June 1996 November 1996 November 1996 December 1996 December 1996 December 1996 February 1997 November 1997 May 1998 May 1998 July 1998 August 1998 February 1999 April 1999 October 1999 January 2000 February 2000 June 2000 September 2000 November 2000 December 2000 Incorporation Recognition as a stock exchange Formulation of business plan Wholesale Debt Market segment goes live Capital Market (Equities) segment goes live Establishment of Investor Grievance Cell Establishment of NSCCL, the first Clearing Corporation Introduction of centralised insurance cover for all trading members Establishment of Investor Protection Fund Became largest stock exchange in the country Commencement of clearing and settlement by NSCCL Launch of S&P CNX Nifty Establishment of Settlement Guarantee Fund Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE Best IT Usage award by Computer Society of India Commencement of trading/settlement in dematerialised securities Dataquest award for Top IT User Launch of CNX Nifty Junior Regional clearing facility goes live Best IT Usage award by Computer Society of India Promotion of joint venture, India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www.nse.co.in Launch of NSE's Certification Programme in Financial Market CYBER CORPORATE OF THE YEAR 1998 award Launch of Automated Lending and Borrowing Mechanism CHIP Web Award by CHIP magazine Setting up of NSE.IT Launch of NSE Research Initiative Commencement of Internet Trading Commencement of Derivatives Trading (Index Futures) Launch of 'Zero Coupon Yield Curve' Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd. Commencement of WAP trading

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June 2001 July 2001 November 2001 December 2001 January 2002 May 2002 October 2002 January 2003 June 2003 August 2003 June 2004 August 2004 March 2005 June 2005 December 2006 January 2007 March 2007 June 2007 October 2007 January 2008 March 2008 April 2008 April 2008 August 2008 August 2009 November 2009 December 2009 February 2010 March 2010 April 2010 July 19, 2010 July 19, 2010 July 28, 2010 October 12, 2010 October 28, 2010 October 29, 2010

Commencement of trading in Index Options Commencement of trading in Options on Individual Securities Commencement of trading in Futures on Individual Securities Launch of NSE VaR for Government Securities Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures Launch of Futures & options in CNXIT Index Launch of STP Interoperability Launch of NSEs electronic interface for listed companies India Innovation Award by EMPI Business School, New Delhi Launch of Futures & options in BANK Nifty Index 'Derivative Exchange of the Year', by Asia Risk magazine Launch of NSE CNBC TV 18 media centre NSE, CRISIL announce launch of IndiaBondWatch.com NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50 Introduction of Mini Nifty derivative contracts on 1st January 2008 Introduction of long term option contracts on S&P CNX Nifty Index Launch of India VIX Launch of Securities Lending & Borrowing Scheme Launch of Currency Derivatives Launch of Interest Rate Futures Launch of Mutual Fund Service System Commencement of settlement of corporate bonds Launch of Currency Futures on additional currency pairs NSE- CME Group & NSE - SGX product cross listing agreement Financial Derivative Exchange of the Year Award' by Asian Banker Commencement of trading of S&P CNX Nifty Futures on CME Real Time dissemination of India VIX. LOI signed with London Stock Exchange Group Introduction of Call auction in Pre-open session Introduction of European Style Stock Options Introduction of Currency Options on USD INR

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NSE Technology
Across the globe, developments in information, communication and network technologies have created paradigm shifts in the securities market operations. Technology has enabled organisations to build new sources of competitive advantage, bring about innovations in products and services, and to provide for new business opportunities. Stock exchanges all over the world have realised the potential of IT and have moved over to electronic trading systems, which are cheaper, have wider reach and provide a better mechanism for trade and post trade execution. NSE believes that technology will continue to provide the necessary impetus for the organization to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. NSE IT set-up is the largest by any company in India. It uses satellite communication technology to energies participation from around 400 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With up gradation of trading hardware, NSE can handle up to 1 million trades per day.
CIRCUIT BREAKERS

The Exchange has implemented index-based market-wide circuit breakers in compulsory rolling settlement with effect from July 02, 2001

INDEX-BASED MARKET-WIDE CIRCUIT BREAKERS


The S & P CNX The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by
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movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier. In case of a 10% movement of either of these indices, there would be a onehour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading. In case of a 15% movement of either index, there shall be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of the day.

In case of a 20% movement of the index, trading shall be halted for the remainder of the day.

S&PCNX NIFTY:
NIFTY is based upon solid economic research it the new world of financial product on the index like index futures, index options and index funds. A trillions calculations were expanded to evolve the rules inside the S&P CNX Nifty index. The result of this work is remarkably simple: The correct size is to use is 50.

Stocks considered for the S&P CNX Nifty must be liquid by the 'Impact cost criterion.

The largest 50 stocks that meet the criterion go into the index. The nifty is uniquely equipped as an index for the index market owing to its Low market impact cost
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High edging effectiveness

Chapter 3

Overview
ORGANISATION PROFILE PROFILE OF SCSL HISTORICAL BACKGROUND OF SCSL ORGANIZATION STRUCTURE
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FUNCTIONS OF SCSL DEPARTMENTS IN SCSL

HISTORICAL BACKGROUND OF THE COMPANY:

Confidence As Strong as Steel

Steel City Securities Limited was incorporated on 22nd February 1995 and raised equity of Rs.105 lakh on 24th June 1995 and obtained the membership of the largest and prestigious National Stock Exchange of H-Limited (NSE) and Bombay Stock Exchange (BSE) in 2000, in its capital market segment. The 1st VSAT for its trading workstation (TWS) at Hyderabad was installed in 1995 and the 2nd at Visakhapatnam in April 1996.
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Presently, there are 64 VSATS installed at more than 50 centers in Andhra Pradesh, Orissa, Tamilnadu and Karnataka. There are 219 computer trading terminals put together connected to their VSAT at the centers (each VSAT can have 5 TWS connected). Since its inception the service of this organization is prompt and there is not a single instance of payout of funds / deliveries delay to any client, from the beginning the firm is committed to continue the same service in future also. Companies basic principle is total commitment in service to all clients with all transparency and ensures that is it their sacred policy not to indulge in own trading, there are no self-motives or necessity to cancel or delay anything. Every branch is fully equipped and independently connected to the NSE Hub at Mumbai, every branch is having 2 to 5 trading terminals connected to VSAT. The company performance has not parallel on NSE. Steel City Securities Ltd. follows a functional organization system. It

provides various services which are provided through different departments. They are:

Trading system:
Deals with online trading facility through the VSAT Registration of clients and interaction with clients Dealing with new sub brokers and making them conversant with the system Provides updated information of a days trading activities.

Data Processing:
Opening of the account after the fulfillment of various formalities. Shares are credited to the De-Mat account by dematerializing the physical shares and those brought from the secondary market. The process of settling the selling and buying obligations takes places through the delivery instruction slip to their respective clients.

Deliveries:
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This department acts as an intermediary between stock exchange and clients. Hence proper knowledge is very essential. Proper records of all inward and outward stocks should be maintained failing which there may be improper deliveries leading to penalties and disagreements with clients. NSCCL is extended the responsibility of settling the delivery obligations of sellers and buyers dealt in a given settlement period.

Board of Directors of Steel City Securities Limited


Chairman Cum 1. 2. 3. 4. 5. Mr. G. Sree Ram Murthy Mr. G. Raja Gopal Reddy Mr. K. Satyanarayana Mr. Satish Kumar Arya Mr. G. Satya Ram Prasad Managing Director Executive Director Executive Director (Surveillance) Director (Operations) Director

THE VARIOUS SERVICE DEPARTMENTS IN SCSL ARE:

Systems Departments Inspection Department H.R. Department Accounts Deliveries Depository Participant Research and Development

ACTIVITIES OF STEELCITY:

STEEL CITY SECURITIES LIMITED SECURITIES INTERNAL PAY BOUGHT OUT OF CLIENTSFUNDSLOSS BY FUNDSIN CLIENTS PAY TRADINGFUNDS NSE FACILITIES

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PAY OUT SETTLEMENT OF TRADESOUT PAY IN SECURITIES PAY

STRUCTURE OF THE COMPANY The total control of the organisation is under the Chairman who is also the Managing Director. Under him there are three Executive Directors for surveillance & operations and also a Sleeping Director. Mr.G.Sree Ram Murthy is the Chairman cum Managing Director, Mr.G.Raja Gopal Reddy the Executive Director looks after the market development and opening of new franchisees. He also looks after requirements of new and existing branches. Mr.K.Satyanarayana the Executive Director, surveillance has an inspection team under him for the purpose of vigilance in branches and franchises. Mr.Satish Kumar Arya is the Director Operations. He controls the trading limits, margins etc. All office related matters are dealt by him. He is also responsible for meeting the requirements and following the rules set by the stock exchanges. Mr.G.S.R.Prasad is the fourth Director who does not play any role in the day to day working of the company. General Manager (Operations) is Mr.Murali is responsible for De-Mat with NSDL / CDSL. General Manager (Systems) is Mr.V.Srinivas who looks after the Networking, Software, Hardware and trading related requirements and VSAT connectivity. Finance and accounts were looked after by Mr.Ramu who is a Chartered Accountant. Mr. Samba Murthy is responsible for the trading and registration of new clients. He is the Trading Manager. Mr. Krishna Naga Bhutan is the Marketing Manager. He is also responsible for conduction various awareness seminars. The legal section deals with the investors problems and legal issues with the company. Even without relation to the company they render legal services.

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ORGANISATIONAL STRUCTURE

C h a ir m a n & M a n a g in g D ir e c t o r

E x e c u t iv e D ir e c t o r

D ir e c to r ( O p e r a t io n s )

E x e c u tiv e D ir e c to r ( S u r v e illa n c e )

B u s in e s s D e v e l o p &m e n t M a r k e tin g

G e n e ra M a n a g e r O p e r a t io n s & S e c u r it ie s

P o r t f o lio M anagem ent S e r v ic e s

G e n e ra l M anager (F & A )

G en eral M a n a g e r IT
S o ftw a re D e v e lo p e r

Sr M anager ( S u r v e illa n c e )

S r M a n a g e rD P O p e r a t io n s p e r a t o r s R & D O

Sr M anager Legal

E q u it y

S r M a n a g e Dr y M a n a g e r R&D A c c o u n ts A c c o u n ts D e r iv e t iv e s A sst M anager (L i a i s) o n M um bai

S o ftw a re P ro je c t L e a d e r

D B A
S y s te m s A d m in is t r a to r M anager I n s p e c t io n

Sr M anager
S u r v ie lla n c e

R e se a rch R e se a rch S to re s E d ito r E d it o r

T e c h n ic a l A n a ly s t

M anager T r a d in g R e g io n a l M anager

S r M a n a g e rH a rd w a re S y s t e m s E n g in e e r

H a rd w a re T r a in e e R e g io n a l M anager B ran ch M anager


A sst
M anager HR

R e g io n a l M anager

R e g io n a l M anager

B ran ch M anager
M anager C o m m o d it ie s

B ra n ch M anager

B ran ch M anager

M anager L o g is t ic s

C o o r d in a t o r

D e a le r s

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The different branches and franchisees of the company report directly to the Head Office in Visakhapatnam and any activity taken up by these should be brought to the notice of the Head Office. Every branch has a Branch Manager, Accountant, Trading Manager and Trading Operator. departments for its smooth functioning. The company has various functional

COMPANY POLICY:
The basic policy of SCSL, is not to indulge in own trading. The basic principle of SCSL is total commitment in service to all clients. The service of SCSL is prompt and hence there are not delays in payout of funds or deliveries to any client. SCSL collects pay in T+1 and its payout in T+3 days. Through SCSL, trade in NSE per day is 200 crores whereas, trade in BSE per day is 4 crores.

CAPITAL:
The base capital is set up a trade center is 1 crore, SCSL raised equity of Rs.105 lakhs during its incorporation. Earlier, SCSL paid Rs.75 lakhs as base capital to NSE when it was set up. Every trade corporation has to maintain a reserve of some amount with NSE. At present, SCSL has 7.5 crores as margin with NSE.

WORKING STAFF:
There is 100 to 150 staff employed in SCSL. The staff draws a salary basing on the cadre they are employed. The salaries in SCSL vary from Rs.2000 to Rs.20000 per month basing on the cadre of the employee.

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EMPLOYEE RECRUITMENT:
In SCSL, the top managements select the candidate and the letter of appointment or rejection is sent to the Board of Directors. The Directors do the placement in SCSL. The placement can either be in the Head Office or in any other branches of SCSL.

PLANNING:
It involves planning of Human Resource Department i.e. recruitment, selection, training etc. it also involves forecasting of personnel changing values, attitudes and behavior of employees.

DIRECTING:
In this company, the personnel manager co-ordinates various managers at different levels as the personnel functions are concerned. The wilting and effective co-operation of employees for the attainment of organization goals is possible through proper direction.

CONTROLLING:
In SCSL, the top management does the controlling. In this aspect, they do auditing training programmes; directing moral surveys are some of the functions of the top management.

RECRUITMENT:
It is the process of searching for prospective employees and simulating them to apply for jobs in the organization. In SCSL, if they want any person, they will give notification in newspaper in order to simulate eligible persons to apply for that job.

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EMPLOYEE RELATION:
The employee relations at all levels remains cordial. Training, Promotion and Transfers are done in SCSL to motivate and increase the morale of the staff. All the employees in SCSL from top to bottom perform their services with sincerity, hard work, dedication and with team spirit due to which SCSL is considered as one of the best stock trading firm in India.

SELECTION, PLACEMENT AND TRAINING:


The top management shall do the selections. Placement is in the head office and in the branches of SCSL, which are in different places. Selected candidates are placed in one of the branches of SCSL and gives proper training.

FUNCTIONS OF THE SCSL:


SCSL provides mock trading to its clients and members. SCSL provides complete automated system both in trading and settlement process. SCSL enables clients to trade both in NSE and BSE. SCSL converts the paper shares into electronic shares through DMAT process. SCSL provides market information. SCSL acts as clearing member for trades taking place through its self. SCSL is a depository participant of NSDL & CDSL and it is a trading and clearing member of NSE & BSE.

FACILITIES PROVIDED TO CLIENT IN SCSL:


Gross exposure facility given in SCSL is 5 times. But, up to 10 times, it is relaxed to clients. Turnover facility given in SCSL to clients is 33.33 times. But, the restrictions are not considered. Minimum of Rs.20,000 margin money is collected
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from professional clients who trade for speculation purpose. For deliver purpose, no margin money is collected. Due to the total commitment in service to its clients, SCSL is considered to be one of the best Stock Broking Companies in India.

NSE BRANCHES OF SCSL:


Mumbai Secunderabad Gajuwaka Vizianagaram Tirupathi Bhimavaram Vijayawada Nellore Nandyala Gudiwada Kakinada Cuddapah Guntur Prodduttur Narsaraopet Chilakalurpet Eluru Ongole

NSE FRANCHISEES:

Rourkela Srikakulam Chennai Anantapur Chittor Amalapuram Madanapalli Panjagutta

Berhampur (2) Visakhapatnam Kukatpalli Bakaram Tenali Pidiguralla Hanumakonda Erragadda

1. BACKOFFICE
To know the trade position of the client, back-office is done in SCSL everyday immediately after the trade ends. STEEL PACK is the package used in back office system. Steel City Software team was designed and maintained this STEELPACK Package. The main modules of back office system are: Trading Finance Importing Exporting Margins Clearing Business Controls Payin-Payout House Keeping

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In the back office, first the Import Export module is opened where the trade file of the days trade is collected and the text file was imported to the system. There, the old closing prices are inserted by new prices from the Bhavcopy file. Bhavcopy is the average of last half-an-hour prices of the scrips. To calculate the net mark to market value, Bhavcopy file is imported from NSE/BSE/NCDEX/MCX. Net mark to market value is to be known to know the profit or loss position of the client, basing on which the Trading Manager of SCSL will decide whether the client can trade or not for the next day on comparing it with the margin paid by the client. After importing the Bhavcopy file, the trading module is opened. In trading module, the sauda status is known from the Sauda Manager. Sauda manager is the number of trade confirmations recorded. Confirmation of trading transaction with brokerage commission is known as Sauda. After Sauda Manager, Net positions process is done. In the net positions process, cumulative net position reports, client-wise net position reports and other reports are made and are given to clients and to the accounts department. The bills are prepared and sent to the respective clients.

2. REPORTS:
After selecting REPORTS option from main menu, the member has to specify the criteria for which the report is needed. The types of reports that may be generated are: Net Position Reports Client Wise and Scrip Wise; Contract Note reports; Client Wise Confirmation reports; Bills Summary reports; bad deliveries reports; auctions reports; objections reports; margins reports; securities reports and miscellaneous reports. The daily reports of various aspects relating to the trading activities are maintained.

3. CLEARING:

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Settlement of trades transacted on an exchange requires smooth, preferably instantaneous, movement of securities and funds in accordance with the prescribed schedule of pay-in / pay-out. Movement of securities has been almost instantaneous in the dematerialized environment. Two depositories are in place to provide electronic transfer of securities. 10 major stock exchanges accounting for about 99% of turnover have been connected to depositories. All actively traded scrips are held, traded and settled in de-mat form. NSE follows a different model where a clearing corporation guarantees settlement obligations emanating from trades.

4. SETTLEMENT:
The trades accumulated over a trading cycle are clubbed together at the end of the trading cycle, positions (trades) are netted and the balance obligations are settled.

THE ONE TYPE OF SETTLEMENT ROLLING SETTLEMENT: In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on hursday and so on.

The following table and figure represent rolling settlement process. A tabular representation of the settlement cycle for rolling settlement is given below: Table-4.1 Activity Day
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Trading Clearing Settlement

Post Settlement

Rolling Settlement Trading Custodial Confirmation Delivery Generation Securities and Funds pay in Securities and Funds pay out Valuation Debit Auction

T T+1 working days T+1 working days T+2 working days T+2 working days T+2 working days T+3 working days

SETTLEMENT AGENCIES: The NSCCL, with the help of clearing members, custodians, clearing banks and depositories settles the trades executed on exchanges. The roles of each of these entities are explained bellow: a. NSCCL b. CLEARING MEMBERS c. CUSTODIANS d. CLEARING BANKS e. DEPOSITORIES f. PROFESSIONAL CLEARING MEMBER

EXPLANATIONS: 1. Trade details from Exchange to NSCCL (real-time and end of day trade file). 2. NSCCL notifies the consummated trade details to CMs/custodians who affirm back. Based on the affirmation, NSCCL applies multilateral netting and determines obligations. 3. Download of obligation and pay-in advice of funds/securities. 4. Instructions to clearing banks to make funds available by pay-in-time. 5. Instructions to depositories to make securities available by pay-in-time.
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6. 7. 8. 9.

Pay-in of securities (NSCCL advises depository to debit pool account of custodians/CMs and credit its account and depository does it). Pay-in of funds (NSCCL advises Clearing Banks to debit account of custodians/CMs and credit its account and clearing bank does it). Pay-out of securities (NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and depository does it). Pay-out of funds (NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and clearing bank does it).

10. Depository informs custodians/CMs through DPs. 11. Clearing Banks inform custodians/CMs. 5. COST OF TRADING: The various costs involved in the process of online trading in Steel City Securities Limited, Visakhapatnam are as follows: a. MARGINS: The base capital to set up a trade center is one crore rupees. Earlier, SCSL paid Rs.75 lakhs as base capital when it was set-up. The Trade Corporation has to maintain a reserve of some amount with NSE where 30% - 50% will be in the form of cash and the remaining in the form of bank guarantees (securities), FDRs etc. SCSL has 7.5. crores as margin with NSE at present. Gross intra-day turnover (buy and sell) of a member shall not exceed 25 times the base capital. Gross exposure of a member at any time shall not exceed 8.5 times the free base capital of one crore rupees and not exceed 12 times over the free base capital of one crore rupees. Minimum of Rs.20000 is collected as margin money from professional clients in SCSL. For delivery purpose no margin money is collected. Client margin collection is calculated in 16 types known as Span calculation and the maximum margin is collected from the clients. SCSL collects 25% margin money in futures
30

from clients. For trading in index 15% margin is charged. For retail clients, the full amount of the value of shares is calculated and collected to allow them to purchase the shares.

Table-5.1

Gross Exposure

Margin Payable ( Rs. Crore)

<= 1 > 1 <=3 > 3& <= 6 > 6& <= 8 > & <=20 > 20

Nil 2.5% in excess of Rs. 1 crores Rs. 5 lakh plus 5% in excess of Rs. 3crores Rs.20 lakh plus 10% in excess of Rs. 6 crores Rs.40 lakh plus 15% in excess of Rs. 8 crores Rs. 220 lakh plus 20 % in excess of Rs.20

b. BROKERAGE: Brokerage is of two types: i. Speculation brokerage or square up commission: This brokerage is charged where buying and selling of shares is done in one day only and at the end of the days trade, the position is zero. The speculation brokerage is charged from 0.01% to 0.03%.
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ii.

Delivery Brokerage: This brokerage is charged where there may be buying or selling lot

remaining at the end of the days trade. The delivery brokerage is charged from 0.03% to 0.30%. As per SEBI, maximum brokerage shouldnt exceed 2.5% both in BSE and NSE. For retail clients, the brokerage charged is 0.7%. A sub-broker charge 2.5% from the clients to sell or buy the shares out of which, SCSL charges 1% from the subbroker.

Service tax: In SCSL, 10.3% service tax on brokerage is collected from the clients. Stamp duty: If the stamp duty of 0.006% on turnover is Rs30 or more, only Rs30 is collected in NSE. In BSE, the minimum is 1Re and the maximum stamp duty is unlimited. Security Transaction Tax This has reference to the Securities Transaction Tax (STT) introduced in the Finance Act 2004. As per the Finance Act 2004, STT on the transactions executed on the Exchange will be as under: NSE, BSE: Options 0.017% (Based only on Premium)
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Square up -------------0.25% on Turnover Delivery --------------0.125% on Turnover F&O 0.017% (Its calculate on Turnover only on Selling )

Exercise (only for options) 0.125% (Strike + Premium Multiplied by quantity) 6)ACCOUNTS: The Accounts/ Finance department maintains the accounts in SCSL. The accounts are prepared in three forms. They are: a.Client-wise net positions, b.Scrip-wise net positions, c.Pay-in and Pay-out settlement of funds.

7)DEMATERIALIZATION AND ELECTRONIC TRANSFER OF SECURITIES: Though de-mat was introduced in 1994, it came into existence in 1996. The depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by dematerializing the securities in the depository model. A depository holds securities in dematerialized form. It

maintains ownership records of securities and effects transfer of ownership through book entry. The two depositories, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) provide services to investors and clearing members through Depository Participants (DPs). They do not change the investors and clearing members directly but charge their DPs, who are free to have their own charge structure for their clients. De-mat Process: When a client places his physical shares for de-mat, SCSL after inputting the information in depository participants sends the physical shares to the company, which
33

issued the shares.

The client code number and the information and the clients

signature is sent to Share Holding Registrar. When a client enters into DP for de-mat purpose, he is given a unique code member. He can know his share position easily. It is known as client ID number. INTERMEDIARIES: There are no intermediaries in between SCSL and NSE, BSE, NCDEX and MCX. Similarly there are no intermediaries in between SCSL and professional clients. Since SCSL is a share broker to NSE, BSE ,NCDEX and MCX the clients operating in SCSL directly, on behalf of other clients are sub-brokers to the ultimate clients who doesnt operate the trade directly. So, there may be subbrokers as intermediaries in between SCSL and clients who do not trade directly in SCSL. As mentioned earlier, SCSL is depository participant. So, SCSL acts as an intermediary between clients and NSDL & CDSL.

6)

7) MARKET INFORMATION: In SCSL, daily the research analyst collects the market information and it is analyzed. The market information is used to forecast the index movement, price movement of the shares and enables the clients to make use of the information in trading to get better results. The research analyst in forecasting the market movement follows the technical analysis, fundamental analysis and efficient market hypothesis. The research analyst

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collects the information about the company, the industry and the economy through different media to know the companys position. Since, the NSE & BSE are markets with strong form efficiency, as the market discounts the information itself very quickly and changes as per the information, the research analyst has only fewer jobs to do here. The research analyst not only analyses the marketing information but, every day in SCSL an edition of the research analysts, suggestions on scrips that have to be bought and sold is also printed which helps the clients of SCSL to invest in shares that are profitable.

Chapter 4

Overview
35

Theoretical framework of derivative market

INTRODUCTION TO DERIVATIVES:
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. As instruments of risk management, these generally do not influence the
36

fluctuations in the underlying asset prices. However, by locking-in asset prices on the profitability and cash flow situation of risk-averse investors.

DEFINITION
Derivative is a product whose value is derived from the value of one or more basic variables called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative is driven by the spot price of wheat which is the "underlying". In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines "Derivative" to includeA security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract that derives its value from the prices, or index of prices, underlying securities. Index futures One-month Two-month Three-month

Individual Stock Futures


One-month Two-month Three-month Options Call Option Index Options One-month Two-month
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Three-month

Individual Stock options


One-month Two-month Three-month

Put Option Index Options One-month Two-month Three-month

Individual Stock options


One-month Two-month Three-month PARTICIPANTS IN A DERIVATIVE MARKET Derivatives attract three types of participants

Hedgers

Speculators Arbitrageurs GLOBAL DERIVATIVES MARKETS Futures history can be traced back to middle ages where markets were meant to address the needs of the farmers and the merchants. The Chicago Board Of Trade(CBOT) was established in 1848 to bring farmers and merchants together. Initially, its main task was to standardize the quantities and qualities of the grains that were traded. The first futures type contract developed was called " to-arrive contract". The CBOT now offers on many different underlying assets in commodities and financial markets. Many other exchanges in the world now offer futures contracts. Eurex, the GermanSwiss derivatives exchange, was the world's biggest financial futures exchange at the
38

end of 1999, overtaking the Chicago Board Of Trade for the first time after a huge increase in contracts traded in 1999. Eurex traded more than 379 million contracts during 1999, 53% more than in 1998. This is expected to be well above the comparable figure for the CBOT, where officials are expecting a fall of about 10% from the 1998 total, when record 281.2 million contracts were traded. LIFFE, the London market, is also expecting a sharp fall in volumes to some 120 million contracts, compared with 194 million in 1998. MATIF, the French derivatives market traded 183 million contracts in 1999, more than double its 1998 total. LIFFE lost its European lead when trading in the futures contracts on 10-year German government bonds (bunds) migrated to the electronic Eurex system two years ago. Like the CBOT, trading volumes are also likely to be lower at the Chicago Mercantile Exchange, the second biggest US futures market.Major Equity Derivative Exchanges in the World

1.

Chicago Mercantile Exchange (CME)4

2. Eurex 3. Hong Kong Futures Exchange 4. The London Int. Financial Futures and Options Exchange (LIFFE) 5. Singapore Exchange 6. Sydney Futures Exchange DERIVATIVES MARKET IN INDIA Derivatives markets broadly can be classified into two categories, those that are traded on the exchange and those traded one to one or 'over the counter7. They are hence known as

Exchange Traded Derivatives OTC Derivatives (over the counter) OTC Equity Derivatives Traditionally equity derivatives have a long history in India in the OTC market. Options of various kinds (called Teji and Mandi and Fatak) in

unorganized markets were traded as early as 1900 in Mumbai.


39

The SCRA however banned all kind of options in 1956.

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

1. Increased volatility in asset prices in financial markets. 2. 3.


costs. Increased integration of national financial markets with the international Marked improvement in communication facilities and sharp decline in their Development of more sophisticated risk management tools, providing economic markets.

4.

agents a wider choice of risk management strategies. TYPES OF DERIVATIVES: Forwards: A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, the parties to the contract negotiate price and quantity bilaterally. The forward contracts are normally traded outside the exchanges. This process of standardization reaches its limit in the organized futures market. Forward contracts are very useful in hedging and speculation. STRATEGIES TO USE DERIVATIVES TRADING 1. HEDGING The classic hedging application would be that of an exporter who expects to receive payment in dollars three months later. He is exposed to the risk of exchange rate fluctuations. By using the currency forward market to sell dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward. 2. SPECULATOR
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If a speculator has information or analysis, which forecasts an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction to book profits. Speculators may well be required to deposit a margin upfront. However, this is generally a relatively small proportion of the value of the assets underlying the forward contract. The use of forward markets here supplies leverage to the speculator.

They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract
size, expiration date and the asset type and quality.

On the expiration date, the contract has to be settled by delivery of the


asset.

If the party wishes to reverse the contract, it has to compulsorily go to the


same counter party, which often results in high prices being charged. FUTURES: History: 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 price. But unlike forward contracts, the futures contracts are standardized and exchange traded. The first exchange that traded financial derivatives was launched in Chicago in the year 1972. A division of the Chicago Mercantile Exchange, it was called the International Monetary Market (IMM) and traded currency futures. The brain behind this was a man called Leo Me lamed, acknowledged as the "father of financial futures" who was then the Chairman of the Chicago Mercantile Exchange. Before IMM opened in 1972, the Chicago Mercantile Exchange sold contracts whose value was counted in millions. By 1990, the underlying value of all contracts traded at the Chicago Mercantile Exchange totaled 50 trillion dollars. These currency futures paved the way the way for the successful marketing of a dizzying array of similar products at the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board options Exchange. By the 1990's these exchanges were trading futures and options on everything from Asian and American
41

stock indexes to interest rate swaps, and their success transformed Chicago almost overnight into the risk-transfer capital of the world. 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. Difference between Futures & Forwards FUTURES 1 2 3 Traded on an Organized exchange Requires Margin payments Daily settlement FORWARDS 1 Over the Counter in nature 2 No margin payments required 3 Settlement takes place at the end of the period 4 5 Standardized Contract terms Higher Liquidity 4 Customized Contract terms 5 Lesser liquidity

Options:
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History: Options made their first major mark in financial history during the tulip-bulb mania in seventeenth century Holland. It was one of the most spectacular get rich quick binges in history. The first tulip was brought into Holland by a botany professor from Vienna. Over a decade, the tulip became the most popular and expensive item in Dutch gardens. The more popular they became, the more tulip bulb prices began rising. That was when options came into the picture. They were initially used for hedging. By purchasing a call option on tulip bulbs, a dealer who was committed to a sales contract could be assured of obtaining a fixed number of bulbs for a set price. Similarly, tulipbulb growers could assure themselves of selling their bulbs at a set price by purchasing put options. Although options have existed for a long time, they were traded OTC, without much knowledge of valuation. The first trading in options began in Europe and the US as early as the seventeenth century. It was only in the early 1900s that a group of firms set up what was known as the put and call Brokers and Dealers Association with the aim of providing a mechanism for bringing buyers and sellers together. If someone wanted to buy an option, he or she would contact one of the member firms. The firm would then attempt to find a seller or writer of the option either from its own clients or those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return for a price. This market however suffered from two deficiencies.
First, there was no secondary market and Second, there was no mechanism to guarantee that the writer of the option

would

honor the contract.

In 1973, Black, Merton and Scholes invented the famed Black-Scholes formula. In April 1973, CBOE was set up specifically for the purpose of trading options. The market for options developed so rapidly that by early '80s, the number of shares underlying the option contract sold each day exceeded the daily volume of shares traded on the NYSE. Since then, there has been no looking back.

CRITERIA FOR STOCKS ELIGIBLE FOR OPTIONS TRADING:


43

The following criteria will have to be met before a stock can be considered eligible for options trading. The stock should be amongst the top 200 scrips, on the basis of average market capitalization during the last six months and the average free float market capitalization should not be less than Rs. 750 Crore. The free float market capitalization means the non-promoter holding in the stock. The non-promoter holding in the company should be at least 30%. The stock should be amongst the top 200 scrips on the basis of average daily volume (in value terms), during the last six months. Further, the average daily volume should not be less than Rs. 5 Crore in the underlying cash market. The stock should be traded on atleast 90% of the trading days in the last six months. The ratio of the daily volatility of the stock vis-a-vis the daily volatility of the index should not be more than4, at any time during the previous six months. Based on these criteria, SEBI approved trading in option contracts on 31 stocks. Index options: These options have the index as the underlying. Some options are European while others are American. Like indexing futures contracts, indexing 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 receives the option premium and is thereby obliged to sell/ buy the asset if the buyer exercises on him. Option price: 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.
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American options: American options are options that can be exercised at any time upto 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. 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 cashflow if it was 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 cashflow it was exercised immediately. A call option on the index is out-of-the-money when the current index stands at a level that 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. Intrinsic value of an option: The option premium can be broken down into two components-intrinsic value and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic value of a call is Max [0, (St -K)] which means the intrinsic value of a call is the greater of 0 or (St -K). Similarly, the intrinsic value of a put is Max [0, (K -S t). K is the strike price and St is the spot price. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value. 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.

45

Differences between Futures and Options Table1 Futures 1 2 3 4 Price is zero, Strike price moves Price is zero Linear pay-off Both long & short at risk Options 1 Strike price is fixed, price moves 2 Price is always positive 3 Non-Linear pay-off 4 Only short at risk.

Similarities between Futures & Options Table2 Futures & options 1 2 Exchange traded Exchange defines the product

TYPES OF OPTIONS 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 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. There are a minimum of 5 strike prices, two 'in-the-money', one 'at-the-money' and two 'out-of-the-money' for every call and put option. At any point of time there are only three contracts available for trading, with 1 month, 2 months and 3 months to expiry. These contracts expire on last Thursday of the expiry month and have a minimum of 3 month expiration cycle. RISK MANAGEMENT Four steps in risk management:
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Understand the nature of various risks. Define a risk management policy for the organization and quantifying Maximum risk that organization is willing to take if quantifiable. Measure the risks if quantifiable and enumerate otherwise. Build internal control mechanism to control and monitor all risks.

Step 1 - Understand Risks Risks can be classified into three categories.


Price or Market Risk Counterparty or Credit Risk Operating Risks

Price Risks This is the risk of loss due to change in market prices. Price risk can increase further due to Market Liquidity Risk, which arises when large positions in individual instruments or exposures reach more than a certain percentage of the market, instrument or issue. Such a large position could be potentially illiquid and be capable of being replaced or hedged out at the current market value and as a result may be assumed to carry extra risk. Counter party Risks This is the risk of loss due to a default of the Counter party in honoring its commitment in a transaction (Credit Risk). If the Counter party is situated in another country, this also involves Country Risk, which is the risk of the Counter party not honoring its commitment because of the restrictions imposed by the government though counter party itself is capable to do so. Dealing Risk Dealing Risk is the sum total of all unsettled transactions due for all dates in future. If the Counter party goes bankrupt on any day, all unsettled transactions 1ould have to be redone in the market at the current rates. The loss would be the differenced between the original contract rate and the current rates. Dealing risk is therefore limited to only the movement in the prices and is measured as a percentage of the total exposure. Settlement Risk
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Settlement risk is the risk of Counterparty defaulting on the day of the settlement. The risk in this case would be 100% of the exposure if the corporate gives value before receiving value from the Counterparty. In addition the transaction would have to be redone at the current market rates. Operating Risks Operational risk is the risk that the organization may be exposed to financial loss either through human error, misjudgment, negligence and malfeasance, or through uncertainty, misunderstanding and confusion as to responsibility and authority. Following are the different kinds of operating risks: Legal Regulatory Errors & Omissions Frauds Custodial Legal Legal risk is the risk that the organization will suffer financial loss either because contracts or individual provisions thereof are unenforceable or inadequately documented, or because the precise relationship with the counterparty is unclear. Regulatory Regulatory risk is the risk of doing a transaction, which is not as per the prevailing rules and laws of the country. Errors & Omissions Errors & Omissions are not uncommon in financial operations. These may relate to price, amount, value date, currency, and buy/sell side or settlement instructions. Frauds Systems

Some examples of frauds are: Front running


48

Circular trading Undisclosed Personal trading Insider trader Routing deals to select brokers
Custodial Custodial risk is the loss of prime documents due to theft, fire, water, termites etc. This risk is enhanced when the documents are in transit. Systems Systems risk is due to significant deficiencies in the design or operation of supporting systems; or inability of systems to develop quickly enough to meet rapidly evolving user requirements; or establishment of a great many diverse, incompatible system configurations, which cannot be effectively linked by the automated transmission of data and which require considerable manual intervention. Step 1 - Define Risk Policy Decide the basic risk policy that the organization wants to have. This may vary from taking no risk (cover all) to taking high risks (open all). Most organizations would fall somewhere in between the two extremes. Risk and reward go hand in hand. Cost Center vs. Profit Center A cost center approach looks at exposure management as insurance against adverse movements. One is not looking for optimization of cost or realization but meeting certain budgeted or targeted rates. In a profit center approach, the business is taking deliberate risks to make money out of price movements. Step 2- Risk Measurement There are a number of different measures of price or market risk, which is mainly, based on historical and current market values Examples and Value At Risk (VAR), Revaluation, modeling, Simulation, Stress Testing, Back Testing, etc.

Step 3- Risk Control


49

Control of Price Risk Position limits are established to control the level of price or market risk taken by the organization. Diversification is used to reduce systematic risk in a given portfolio.

Control of Credit Risk Credit limits are established for each counter party, for both Dealing Risk and Settlement Risk separately depending upon the risk perception of the counter party. Control of Operating Risk Establishment of an effective and efficient internal control structure over the trading and settlement activities, as well as implementing a timely over and accurate management information system (MLS) A. FUTURES:

A future contract is an agreement between two parties to buy or sell an asset at certain time. In the future at a certain price. Future contrasts are special types of forward contrasts, in the sense that the former are standardized exchange-trade contrasts. a. b. a. INDEX FEATURES. INDIVIDUAL STOCK FEATURES. INDEX FUTURES:

NSE trades nifty futures contract having expiry cycle for index futures. All the contrasts expiry date is last Thursday of every month. 1. One - Month 2. Two - Month 3. Three - Month b. INDIVIDUAL STOCK FUTURES: Trading in individual stock futures commenced on the NSE November 2001. These contrasts are cash settled on T+l basis. Expiry cycle for stock futures 1. One - month 2. Two -month 3. Three month
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A new contract is introduced on the trading day following the expiry of the near month contract. B. OPTIONS:

Options are fundamentally different from towards and futures contracts. An options dues the holder of the option the right to do some thing. The holder dose not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed them selves to doing some thing. OPTIONS ARE TWO TYPES a. Call option b. Put option A. CALL OPTION: A call option means gives the holder the right but not the obligation to sell an asset by a certain date for certain price. 1. INDEX OPTION 2. INDIVIDUAL STOCK OPTION 1. INDEX OPTION: these options have index as the underlying. Some options are European while others are American. Expiry cycle for index option: 1. One - Month 2. Two - Month 3. Three -Month 2. INDIVIDUAL STOCK OPTION: Stock options are options on individual stocks. Options currently trade on over 500 stocks in the United States. A contact gives the holder the right to buy or sell a share at the specified price. Expiry cycle for stock options: 1. One -Month 2. Two -Month 3. Three Month

51

B. PUT OPTIONS: A put option gives the holder the right but not the obligation to sell and asse5t y a certain date for a certain price. The put option is two types: a. b. INDEX OPTION INDIVIDUAL STOCK OPTION

A. INDEX OPTION: On NSE index option market, contracts at different strikes. Expiry cycle for index option: 1. One -Month 2. Two -Month 3. Three -Month B .INDIVIDUAL STOCK OPTION: Trading in stock option commence on the NSE from July 2001 these contracts are American style and or settled in cash. Expiry cycle for stock option: 1. One 2. Two - Month -Month

3. Three -Month FUTURES AND OPTIONS MARKET TRADING SYSTEM The software for Futures and Options Market has been developed to facilitate efficient and transparent trading in futures and options instruments. Keeping in view the familiarity of trading members with the current Capital market trading system, modifications have been performed in the existing capital market trading system so as to make it suitable for trading futures and options.

52

Basic Trading Terminology BASIS OF TRADING The NEAT-F&O system supports an order driven market, wherein orders match automatically. Order matching is essentially on the basis of notify the regular lot size and ticks from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and goes and sits in the respective outstanding order book in the system. Member type 1. TM 2. CM+TM 3. PCM + TM 4. PCM Case (I): Clearing Member Corporate Manager: (i) Can view outstanding orders, previous trades and Net position of his client Trading Members by putting the TM ID and leaving the Branch Id and dealer id blank. Case (II): Clearing Member and Trading Member Corporate Manager: (i) Can view outstanding orders, previous trades and Net position of his client Trading Members by putting the TM ID and leaving the Branch Id and dealer id blank. (ii) Can view outstanding orders, previous trades and Net positions entered for himself by entering his own TMID, Branch Id and User Id. This is his default Case (III): Clearing Member and Trading Member Dealer: security, its price, time and quantity. All quantity fields are in units and price in rupees. The Exchange will size for each of the contracts traded on this segment

(1)

Can only view requests entered by him.

Case (IV): Trading Member Corporate Manager:

1. Can view outstanding requests and activity log for requests entered by him by
entering his own Branch and User Ids. This is his default screen.

2. Can view outstanding requests entered by his dealers and/or branch managers
by either entering the Branch and/or User Ids or leaving them blank.
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MARKET TYPE The Futures and Options Market system has one type of market i.e. the Normal Market Normal Market Normal market consists of various book types wherein orders are segregated as Regular lot orders and Stop Loss orders depending on their order attributes. All orders have to be of regular lot size or multiples thereof. ORDER BOOKS As and when valid orders are entered or received by the system, they are first numbered, time stamped and then scanned for a potential match. This means that each order has a distinctive order number and a unique time stamp on it. If a match is not found, then the orders are stored in the books as per price/time priority. Price priority means that if two orders are entered into the system, the order having the best price gets priority. Time priority means if two orders having the same price are entered; the order entered first gets priority. Best price for a sell order is the lowest price and for a buy order, it is the highest price. The Futures and Options Market segment has following types of books: Regular Lot Book The Regular Lot Book contains all regular lot orders. The system first attempts to match an active regular lot order against passive orders in this book. Stop-Loss Book Stop Loss orders are stored in this book till the trigger price specified in the order is reached or surpassed. When the trigger price is reached or surpassed, the order is queued for entry into the Regular lot book. The stop loss condition is met under the following circumstances: Sell Order - A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order. Buy Order - A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order.
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ORDER TYPES AND CONDITIONS The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following categories: Time Conditions Price Conditions Other Conditions Several combinations of the above are allowed thereby providing enormous flexibility to the users. The order types and conditions are summarized below. Time Conditions DAY ORDER - A DAY order, as the name suggests is an order which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day.

IOC - An Immediate or Cancel (IOC) order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

Price Condition STOP-LOSS - This facility allows the user to release an order into the system, after the market price of the security reaches or crosses a there sold price THE TRADING DAY The system is normally made available for trading on all days except Saturdays, Sundays and other Exchange notified holidays. A trading day typically consists of a number of discrete stages as explained below: PRE-OPEN PHASE The Pre-Open period is applicable only to regular lot orders in the normal market. At the start of Pre-Open session, market watch and messages are downloaded at the trader workstations. For the trading member, all functions are available except quick order
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cancellation. Order matching takes place based on which a potential opening price is computed and displayed although no trades are generated. The Trading Member can carry out the following activities at this stage:

Set up Market Watch (contracts which the user would like to view on screen) Inquiries Order Entry Order Cancellation (Quick Order Cancellation is not allowed) Order Modification

At the start of the Pre-Open phase, a message is displayed indicating that the market is in Pre-Open phase. OPENING This is a transition phase between pre-open and open phases. This phase immediately follows the end of market pre-open phase. A user who does not login before the end of pre-open period will not be able to do so until normal market opens for trading. Users can enter orders during the opening phase. However, the system confirms these orders only after the normal market opens for trading. During this phase the system generates actual trades across all contracts from various buy / sell orders present in the system. All the trades in a given contract will be executed at the opening price of that contract. The opening price will be the LTP value calculated when the pre-open phase ends. The start and end of the opening phase is indicated by the following system messages: Start Message: End Message: OPEN PHASE The open period indicates the commencement of trading activity. To signify the start of trading, a message is sent to all trader workstations. Order entry is allowed when all contracts have been opened. During this phase, orders are matched on a continuous basis. Trading in all instruments is allowed unless Exchange specifically prohibits them. The following activities are allowed at this stage: Inquiries
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The Pre-open period has ended. Please wait for contracts to The Normal market has opened.

be opened for trading.

Order Entry Order Modification Order Cancellation (Including quick order cancellation) Trade Cancellation Requests NORMAL MARKET CLOSE When market closes, normal trading in all instruments for that market comes to an end. No further orders are accepted, but the user is permitted to perform activities like inquiries, report requests and trade cancellation/ modification requests. CLOSING PRICE GENERATION During this period of the market, closing prices for all contracts are generated. These prices are then updated in the market watch overwriting the field displaying the Last Traded Price. At the end of this period, a Market Statistics report is also sent to all users of the system. Users can request for trade reports and trade cancellation/modification during this period. HOW TO START TWO TYPES OF SOFTWARE There are two types of software in the system: NEAT-F&O NEAT-F&O Help These software are in a group called F&O or Futures & Options Market under Program Manager in Windows. NEAT-F&O is the main trading software. NEAT Help offers a quick way to seek information on various features of the NEAT-F&O system. Starting the application is simple. Open the window that contains the applications program-item icon

Choose the program-item icon and press [Enter] key or double click on it using the mouse

On starting NEAT-F&O, the logon screen appears. On starting NEAT Help, a contents page appears for further selection. LOGIN PROCESS On starting NEAT-F&O application, the logon screen appears with the following details: User ID
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Trading Member ID Password New Password In order to logon to the system, the user must specify a valid User ID, Trading Member ID and corresponding password. A valid combination of User ID, Trading Member ID and password is needed to access the system. Press [Tab] key to move to the next field. [Shift+Tab] keys can be used to move to the previous field(s). After entering IDs and password, press the [Enter] key to complete the logon procedure. LOGIN PROCESS

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MARAKET WATCH

User ID Each Trading Member can have more than one user. The number of users allowed for each Trading Member is notified by the Exchange from time to time. Each user of a Trading Member must be registered with the exchange and is assigned an unique user ID.

Trading Member ID The exchange assigns a Trading Member ID to each Trading Member. The Trading Member ID is unique and functions as a reference for all orders/trades of different users. This ID is common for all users of a particular Trading Member. The Trading Member ID and User ID form a unique and valid combination. Password
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When a user logs in for the first time, he has to enter the default password provided by the exchange. On entering this password, the system requests the user to enter a new password in the 'New Password' field. On entering the new password, the system requests for a confirmation of this new password. The user knows this new password only. The password should contain minimum of six characters and maximum of eight characters. A combination of characters and numbers is allowed in the password. The password can be changed if the user desires so and a new password can be entered. The new password must be different from the old password. Password appears in the encrypted form and thus complete secrecy is maintained. The system ensures that the change in password for all users (password expiry period is parameterised by the Exchange). The user can logon by entering a new password as per the procedure outlined above. In the event of a user forgetting his password, the Trading Member is required to request the exchange in writing to reset the password of that user id. On receiving this, the user password is reset to the default password set by the exchange (i.e. NEATF&O). The user can then logon by entering a new password as per the procedure outlined above. LOG OFF/EXIT FROM THE APPLICATION Press [Alt+F4] keys or select the [Exit] button to log off/exit the application. At the Log-on Screen One can exit from the application by pressing [AU+F4] keys at the log-on screen. Press [Alt+F4] keys to invoke the log-off screen. The log-off screen displays the following options: Permanent sign off Temporary sign off and Cancel Permanent Sign Off: As the name suggests, a user can log-off permanently from the trading system by selecting this option. The user is logged-off and the log-on screen appears. Temporary Sign-Off Temporary sign-off is a useful feature which allows a user to disallow temporary access to the trading software without actually logging out of the trading system.
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During a temporary sign-off period, the application continues to receive all market updates in the background. However, the user cannot enter orders or make inquiries. This allows the user to leave the trading system temporarily inactive and prevent unauthorized access to the system. On selecting the temporary sign-off option, a password entry screen is displayed. The use of the NEAT-F&O system is enabled on entering the correct password. Cancel On selection of this option, the user comes out of Sign off screen. FUTURES AND OPTIONS TRADING SYSTEM: In SCSL the futures and options trading systems in NSE called NEAT -f & O trading system provides a fully automated screen - based trading for Nifty futures 7 options on a national wide basis as well as online monitoring and surveillance mechanism. It supports an order driven market and provides Complete transparency of trading operations. It is similar to that of trading of equities in the cash market segment. The software for the F&O market has been developed to facilitate efficient and transparent trading in futures and options instruments. Keeping in view the familiarity of trading numbers with the current capital market trading system, modifications have been performed in the existing capital market trading system so as to make it suitable for trading futures and options. CONTRACT SPECIFICATIONS FOR INDEX FUTURES: NSE trades Nifty futures contracts having one - month, two - month and three - month expiry circles. All contracts expire on the last Thursday of every month. Thus a January expiration contracts would expire on the last Thursday of January and February expiry contracts would cease trading on the last Thursday of February. On the Friday following the last Thursday a new contract having three - month expiry would be introduced for trading.

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Jan Jan 29 contract ---------------------- Feb 26 contract

feb

mar

apr

may

-------------------------------------------- Mar 26 contract -------------------------------------------------------------------------------------------------Apr 30 contract -------------------------------------------------------------------------------------------------May 28 contract -------------------------------------------------------------------------------------------------June 25 contract The figure shows the contract cycle for future contracts on NSE 's derivatives market. As can be seen, at any given point of time, three contracts are available for trading - a near - a month, a middle -month and a far - month as the January contract expires on the last Saturday of the month a new three month contract starts from the trading from the following day, once more making available three 9index future contracts for trading. CONTRACT SPECIFICATIONS FOR INDEX OPTIONS: On NSE index options market, contracts at different strikes, having one-month, twomonth expiry cycles are available for trading there are typically one-month two-month & three-month options each with five different strikes available for trading hence at a given point in time there are minimum 3 * 5 * 2 or 30 options products CONTRACTS SPECIFICATIONS FOR STOCK FUTURES: Trading in stock futures commenced on the NSE November 2001. These contracts are cash settled on T+1 basis. The expression cycle for stock futures in the same as for index futures, index options and stock options. A new contract is introduced on the trading day following the expiry of the near month contract.
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CONTRACTS SPECIFICATIONS FOR STOCK OPTIONS Trading in stock options commence on the NSE from July 2001 these contacts are American style and are settled in cash .The expiry cycle for stock options is the same as for index futures and index options two in-the-money contracts, two out-ofthe-money contracts and one at-the-money contracts available for trading. SWOT ANALYSIS Table-3

STRENGTH Hedging Risk can be quantified among Call & Put

WEAKNESS Minimum lot size is Two lakh High fluctuations less liquidity Complex system when compared to stock market Adequate margin

OPPORTUNITY Hedging Opportunity for big money

THREATS Lack of knowledge amonginvestors Cash market

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INQUIRY: Inquiry about the market status, the shares and derivatives and their prices. ORDER ENTRY: Placing an order to buy or sell the scripts by coating the price and quantity of the shares and derivatives. ORDER MODIFICATION: Modifying the order that has been already placed. The modification may be with respect to price or quantity. ORDER CANCELLATION: The order placed already can also be cancelled if the price or the quantity of scrip is not satisfactory. Order cancellation also includes quick order cancellation. MARKET CLOSE: Where the market closes, trading in all instruments for that market comes to an end. No further orders are accepted, but the user is permitted to perform activities like inquiries. SURCON: Surveillance and control (SURCON) is the period after the market close during which the user have inquiry access only. After the end of SURCON period the system processes the data for making the system available for the next trading day. When the system start processing data, the interactive connection with the NEAT system is lost and then message to that effect is displaye3d at the trader work station. NEAT system enables members from across the country to trade simultaneously with enormous ease and efficiency. A number punches into the c is executed through the mainframe computer of the exchange as soon as the order a matching sell or busty order from a counter party. Computer quantity of securities and the price at which he wants and the transaction.The NSE opens at 9:55 AM and the trading starts at 10:00 AM 5 min is given for the stock brokers to quote their prices and to get a recap of the yesterday prices of different scrip's, the trading ends at 3:30 PM. The auction market starts at 4:00 PM. And continues till 4:30PM after normal trading and derivatives trading. from punched by him finds

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In BSE the trade starts at 9:55AM and end at 3:30 PM. A grace time of 20 min from 3:40PM to 4:00 PM is given in BSE as "end of the section" for trading. MOCK TRADING: NSE conducts mock trading for all its trading members. The mock trading usually takes place once in a month or in two months Mock trading is the process where the regular d3erivatives trading to done at all the wok stations, which are registered with NSE. Though the derivatives trading are done payments of funds and deliveries don't take place. Though the trade results in turn over in crores there is no transfer of funds or shares or derivatives certificates. The Mock-trading process is similar to the regular trading process. Mock trading is generally done on Saturday as it is not a working day for the stock exchange and it doesn't affect the daily trade in NSE. Mock -trading enables the operators operate efficiently and to adjust to the changes made if any in the trading system. REQUIREMENTS FOR OPENING THE ACCOUNT: The following requirements for opening the account
Photo Identification proof (like driving license, passport, voter identity card,

PAN card)
Address proof (telephone bill, electricity bill) Bank account (must be compulsory attestation of the bank manager)

PUTTING THE ORDER: There are two types of orders in derivatives market
Selling order Buying order

SELLING ORDER: If selling order means how many scrip's will in the share market. BUYING ORDER: If buying order means how much scrip will buy in the share market.
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MARGINS: The margin of SCSL stock broking limited is RS 10,000,00 and derivatives market margin is RS 2 lack minimum. The exposure we give four times. CLIENT CODE: The SCSL digits. PAY - OFFS FOR FUTURES: What is a pay-off? A payoff is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. This is generally depicted in the form of payoff diagrams, which show the price of the underlying asset on the X-axis and the profit/losses on the Y-axis. 1. 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 downside. Take the case of the speculator who buys a 2-month NIFTY index futures contract when the NIFTY stands at 1220. The underlined 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. Profit stock broking limited the client code is five digits. One alphabet and four

1220 Nifty

Loss
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Graph shows the profit and losses for a long futures position. The investor bought futures when the index was 1220. If the index goes up, his futures position starts making profit. If the index falls , his futures position starts showing losses. Payoff for seller of futures: Short futures The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who sells a two months NIFTY index futures contract when the NIFTY stands at 1220. Profit

1220 Nifty

Loss The underlying asset in this case is NIFTY portfolio. When the index moves down, the short futures position starts making profits, and when the index moves up it starts making losses. The graph shows the profits or losses for a short futures position. The investor sells futures when the index was 1220 if the index goes down. EQUITY INDEX FUTURES A futures contract on the stock market index gives its owner the right and obligation to buy or sell the portfolio of stocks characterized by the index. Stock index futures are cash settled; there is no delivery of the underlying stocks. In their short history of trading, index futures have had a great impact on the world's securities markets. Indeed, index futures trading have been accused of making the world's stock markets more volatile than ever before. The critics claim that individual investors have been driven out to the equity markets because the actions of institutional trader5s in both the spot and futures markets
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cause stock values to gyrate with no links to their fundamental values. Whether stock index futures trading are a blessing or a curse is debatable. It is certainly true, however, that its existence had revolutionized the art and science of institutional equity portfolio management. OPTION PAYOFFS The optiotnality 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 pay off is exactly the opposite. His profits are limited to the option premium; however his losses are potentially unlimited. These non-linear payoffs generate various payoffs by using combinations of options and the underlying. We look here at the six basic payoffs.

PAYOFF: LONG NIFTY profit

60 0 60 loss

1160 1220

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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 prices, St Once it is purchased the investor is said to be "long" the asset.

PAYOFF: SHORT NIFTY Profit

60 1160 1220 1230 0 -60 nifty

Loss Payoff profile for seller of asset: Short asset In this basic position, an investor shorts the underlying asset, Nifty for instance, for 1220, and buy6s it back at a future date at an unknown price St Once it is sold the investor is said to be "short" the asset. 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 exceeds the strikes 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 options expire un-exercised. His loss in this case is the premium he paid for buying the option.
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Profit

1250 0 NIFTY 86.60 Loss The graph 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. If upon expiration, Nifty closes above the strike of 1250, the buyer would exercise his options and profit to the extent of the difference between the Nifty-close and the strike price. The profit possible on this option is potentially unlimited. However if Nifty falls below 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 Payoff profiles 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 changes 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 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.

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Profit

86.60 0 1250 Nifty

Loss The graph 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 writers 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 in potentially unlimited, whereas the Rs.86.69 charged by him.

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 sport 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 premieum; he paid for buying the option.

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Profit

0 1250 61.70 Nifty

Loss The graph 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 expiration, Nifty closes below the strike of 1250 the buyer would exercise hisOption 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. Payoff profile for writer of put options: Short put A put option gives the buyer the right to sell the underlying asset at the specified in the option. For selling the option, the writer of the option changes 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.

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Profit

1250 61.70 Nifty 0 Loss The graph shows the profits/losses for 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 Nifty-close. MARKET INFORMATION: In SCSL the daily research analyst collects the market information and it is analyzed. The market information is used to forecast the index moment, price moment of the share and enables the client to make use of information in trading to get better results. The research analyst in forecasting the market moment follows the technical analysis fundamental analysi8s and efficient market hypothesis and derivatives market and risk management. The research analyst collects the information about the company, the industry, economy and the economy through different media to know the company, the industry, economy and the economy through different media to know the company's position.

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The research analyst follows the market closely by watching the price moment of the shares and derivatives in the market. The technical analysis is very helpful in making industry decisions. The research analyst follows different tools of technical analysis Japanese candlestick method ELLIBOT were theory, Dow theory, price trends and volume trends, volatility, floating stock and volume of trade etc., to access the market. Technical analysis reveals the moment of the scrip. It explains when to buy share and derivative and when to sell. So, the resear5ch analyst gives must to the importance to the technical analysis to forecast the price moment of the script accurately. Since, the NSE & BSE are markets with strong from efficiency as the market discounts the information itself very quickly and changes as per the information the research analyst has only fewer jobs to do here.The research analyst not only analysis the marketing information but, everyday in SCSL an edition of research analyst's suggestions on scrip's that have to be bought an sold is also printed which help the clients of SCSL to invest in shares that are profitable. Mostly, the predictions of the research analyst about the market movement prove to be accurate. So market information in SCSL is trust worthy.

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CLEARING AND SETTLEMENT NATIONAL STOCK EXCHANGE (NSE) The futures and Options trading system at NSE is called NEAT-F & O trading system (National Stock Exchange Automated Trading for Nifty futures & Options and stock futures & Options on a nationwide basis and an online monitoring and surveillance mechanism. It support an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. The NEAT two types of users access F& O trading system. 1. Trading Members 2. Clearing Member. MEMBERSHIP CRITERIA NSE and BSE admit members on its derivatives market in accordance with the rules & regulations of their respective exchanges and the norms specified by SEBI. These are SEBI guidelines for a membership to trade in derivatives market. NSE Clearing Member (CM) Net worth-300 lakh Interest - free Security Deposits - Rs. 25 lakh Collateral Security Deposit - Rs. 25 lakh In addition for every TM he wishers to clear for the CM has to deposit Rs. 10 lakh Trading Member (TM) Net worth -Rs. 100 lakh Interest - Free Security Deposit - Rs. 8 lakh Annual Subscription free - Rs. 25 thousand The Non-refundable fee paid by the members is exclusive and will be a total of Rs. 8 lakhs if the member has both Clearing and Trading rights Participants A participant is a client of trading members like financial institutions. These clients may trade through multiple trading members but settle through a single clearing members.
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1. PCM-Clear for others 2. CM+TM -Traders and Clear for Self and Others 3. TM +SCM- Traders and Clear for self 4. TM-Trades for Self and clear through others. NCCL undertake clearing and settlement of all deal executed on the NSE s F&O segment. It acts as legal counter party to all deal on the F&O segment and guarantees settlement. All futures and options contr45acts are cash settle., i.e. through exchange of cash. The underlying for index futures/options of the Nifty index cannot be delivere4d. These contracts, therefore have to be settled in cash. Futures and options on individual securities can be delivered as in the spot market. However, it has been currently mandated that stock opt9ions and futures would also be cash settled. The settlement amount for a clear ingmemember /clients in respect of MTM, premium, and final exercise settlement. NSE RISK CONTROL MEASURES The NSCCL rias developed a comprehensive risk containment mechanism for the F&O segment. The salient features of risk containment mechanism on F&O segment are: 1. CM and whenever a TM exceed the limits, it stops that particular TM from further 2. A separate settlement guarantee fund for this segment has been created out of the capital members. The fund had a balance of Rs.648 crore at the end of March 2002. the most critical component of risk containment mechanism for F&O segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out on-line through parallel Risk Management System (PRISM). PRISM uses SPAN (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI. trading.

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NSE - SPAN The objective of NSE-SPAN is to identify overall risk in a portfolio of all futures and options contracts for each member. The system treats futures and options contracts uniformly while at the same time recognizing the unique exposures associated with options portfolios, like extremely deep out -of- the -money short positions and intermonth risk. Its over-riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer to the next day based on 99% VaR methodology. SPAN considers uniqueness from one day

The financial soundness of the members is the key to risk management. Therefore,

the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent.

NSCCL charges an up front margin The open position of the members are marked to market based on contract
settlement price for each contract. The difference is settled in cash on a T+l basis. CMs are provided a trading terminal for the purpose of monitoring the open position of all the TM s clearing and setting through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intraday exposure limits set up by a of options portfolios. The following factors affect the value of an option: 1. Underlying market price 2. Strike price 3. Volatility (variability) of underlying instrument 4. Time to expiration 5. Interest rate As these factors change, the value of options maintained within a portfolio also changes. Thu8s, SPAN constructs scenarios of probable changes underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to" the next. It
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then sets the margin requirement to cover this one-day loss. The complex calculations (e.g. the pricing of options) in SPAN are executed by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and other necessary data inputs for margin calculations are provided to members daily in a file called the SPAN risk parameter file. Members can apply the data contained in the risk parameter files, to their specific portfolios of futures and options contracts to determine their SPAN margin requirements. Hence, members need not execute a complex option pricing calculation, which is performed by NSCCL. SPAN has the ability to estimate risk for5 combined futures and options portfolios, and also re-value the same under various scenario of changing market condition.

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Chapter 5

Overview
Practical aspects of derivative market in Steel City Securities Ltd.

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ANALYSIS OF THE DATA


BUSSINESS GROWTH IN DERIVATIVES SEGMENT
Year Index Futures Stock Futures Index Options Stock Options Total Average Daily Turnover (Rs. cr.)

No. of contracts

No. of contracts

No. of contracts

Notional No. of Turnover contracts (Rs. cr.)

Notional No. of Turnover contracts (Rs. cr.)

201011 165023653 186041459 145591240 650638557 341379523 18365365 8027964 32508393 1030344 1034212062 6792939049 7 221577980 203587952 104955401 80905493 47043066 32368842 10676843 212088444 3731501 13295970 229226 657390497 425000000 217000000 158000000 45310 52153 29543 19220 115150 72392

2009- 178306889 10 2008- 210428103 09 2007- 156598579 08 2006- 81487424 07 2005- 58537886 06 2004- 21635449 05 2003- 17191668 04 2002- 2126763 03 2001- 1025588 02 2000- 90580 01

140162270 506065

55366038 1362111 25157438 791906 12935116 338469 3293558 121943 1732414 52816 442241 9246 3765 -

9460631 359137 5283310 193795 5240776 180253

5045112 168836 5583071 217207 3523062 100131 1037529 25163 -

77017185 10107 56886776 16768909 4196873 90580 8388 1752 410 11


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1957856 175900 -

ANALYSIS & INTERPRETATION Derivatives Trading on the NSE commenced with S&P CNX Nifty Index Futures on 12/06/2000.The Trading in Index Options commenced on 4/06/2001.NSE is the largest Derivatives Exchange in India. We trade Nifty in Derivatives as Future Index. There is a facility for small investors in derivatives i.e. Options . Options plays only with premium we have to pay only premium but not full amount. Index is the behaviour of market

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Data for FUTIDX-NIFTY from 01-04-2011 to 28-04-2011


Turnover in Date 01-Apr11 04-Apr11 05-Apr11 06-Apr11 07-Apr11 08-Apr11 11-Apr11 13-Apr11 15-Apr11 18-Apr11 19-Apr11 20-Apr11 21-Apr11 25-Apr11 26-Apr11 27-Apr11 Expiry 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 Open 5865.1 5874 6000 5933.05 5910 5904.95 5836.9 5758.8 5923.8 5831.5 5712 5800.25 5905.7 5890 5393.45 5902 High 5884.7 5955.3 6000 5971.05 5932.4 5927 5848.6 5947.6 5923.8 5920.95 5781.95 5875 5931.65 5925 5907.9 5904.9 Low 5837 5850 5871.7 5880.3 5881.3 5831.6 5796.5 5750.7 5820.7 5727.1 5703 5767.3 5880.1 5875.6 5393.5 5820.1 Close 5861.4 5943.3 5932.6 5911 5902 5854.9 5803.7 5938.1 5834.2 5736 5760.3 5870.6 5903.6 5886.5 5881.1 5836.6 LTP 5865 5948 5926 5912 5902.1 5859.3 5798 5944 5825 5739 5760.1 5874 5901.6 5877 5875 5835.9 Settle Price 5861.35 5943.3 5932.6 5910.95 5902 5854.9 5803.65 5938.1 5834.15 5736 5760.3 5870.6 5903.55 5886.5 5881.1 5836.55 Lacs 947696.8 1011339 1172140 1147387 728239.4 1127774 937901.3 1458728 1237361 1734853 1097331 1264319 991777.9 733543.7 1771224 1122505 Open Int 24680200 27004600 26905350 26908300 26738800 25447700 24331750 26039650 25448700 24802350 24315150 23191800 22808700 21315200 14379900 13357750 Change in OI -233550 2324400 -99250 2950 -169500 1291100 1115950 1707900 -590950 -646350 -487200 1123350 -383100 1493500 6935300 1022150

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GRAPH FUTIDX-NIFTY from 01-04-2011 to 28-04-2011

ANALYSIS & INTERPRETATION From the above graph Futidx nifty open price at the starting of Apr contract in 5860.40.At the middle of the month future index swings to 5943.60.But the open interest position decreases from the middle of month which indicates profit taking of traders short covering makes future index slowly down to 5735.90. at that moment price slightly increases and it closing at 5839.

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Data for FUTSTK-HDFCBANK from 01-04-2011 to 28-04-2011

Date 01-Apr11 04-Apr11 05-Apr11 06-Apr11 07-Apr11 08-Apr11 11-Apr11 13-Apr11 15-Apr11 18-Apr11 19-Apr11 20-Apr11 21-Apr11 25-Apr11 26-Apr11 27-Apr11

Expiry 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11

Open 2365 2350 2399 2404.05 2385 2365 2335 2287.45 2379 2370.5 2349 2368.6 2397.25 2390 2400.3 2376.35

High 2374.8 2421.7 2419.65 2407.75 2386.75 2393.8 2348 2393.5 2401 2412 2367 2399.5 2424.6 2445 2400.3 2383.45

Low 2336.5 2350 2376.8 2361.1 2352 2355 2302 2281.35 2353.45 2315.1 2330.5 2354 2392.6 2390 2346.1 2333.35

Close 2350.9 2414.2 2405.3 2387.7 2368.75 2361.65 2308.55 2383.65 2370 2322.4 2353.85 2386.75 2416.8 2401.3 2366.8 2357

LTP 2358.45 2419.5 2395 2387.15 2369 2360 2308.9 2392 2373.8 2322.5 2352 2392.05 2416 2400.3 2368 2362.8

Settle Price 2350.9 2414.2 2405.3 2387.7 2368.75 2361.65 2308.55 2383.65 2370 2322.4 2353.85 2386.75 2416.8 2401.3 2366.8 2357

Open Int 2385375 2587125 2540625 2470250 2408625 2379500 2321500 2298875 2318125 2315250 2037875 1925375 1844125 1771875 1311875 1319875

Change in OI 77750 201750 -46500 -70375 -61625 -29125 -58000 -22625 19250 -2875 -277375 -112500 -81250 -72250 -460000 8000

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GRAPHFUTSTK-HDFCBANK from 01-04-2011 to 28-04-2011

ANALYSIS & INTERPRETATION Banks Yet to reduce interest rates public sector entities and private Corporate have began rushing to the corporate bond markets. Bankers said the funds raised at least Rs.13,000 crores was through Bonds and Insurance. Since the beginning of the Current Financial year. The interest rates continued to show downward trend and this will also reflect in Positive Credit growth in the Financial Year 2011 for instance

HDFCBANK sees a Credit growth about 20% in Financial Year 2011.

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Data for FUTSTK-WIPRO from 01-04-2011 to 28-04-2011

Date 01-Apr11 04-Apr11 05-Apr11 06-Apr11 07-Apr11 08-Apr11 11-Apr11 13-Apr11 15-Apr11 18-Apr11 19-Apr11 20-Apr11 21-Apr11 25-Apr11 26-Apr11 27-Apr11

Expiry 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11

Open 480 480.25 486.15 485.3 466 471.55 466.65 461 473.9 451.55 443.4 454 465.95 462.65 465.2 449.95

High 482.85 491.95 487.45 485.75 474.75 473 467 476.85 473.9 457.1 453.4 466.9 473.4 469 467.7 455.45

Low 473.45 480.25 474.95 463.05 461.25 460.3 459.3 457.65 448.4 444.25 440.8 454 460.5 462 454 445.3

Close 479.55 484.9 483.6 467.8 473.75 467.7 462.6 475.15 450.25 445.6 451.45 465.05 462.65 466 464.7 450.9

LTP 479 485 483.95 466.85 474.4 467 462.5 475 448.95 445.4 452.5 463.05 463.25 466.05 464.15 450.15

Settle Price 479.55 484.9 483.6 467.8 473.75 467.7 462.6 475.15 450.25 445.6 451.45 465.05 462.65 466 464.7 450.9

Open Int 2838000 3286500 3209500 3410000 3177500 3237000 3272000 3516000 3593500 3414000 3371000 3275000 3189000 3173000 2198500 1680500

Change in OI 164000 448500 -77000 200500 -232500 59500 35000 244000 77500 -179500 -43000 -96000 -86000 -16000 -974500 -518000

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GRAPH FUTSTK-WIPRO from 01-04-2011 to 28-04-2011

ANALYSIS & INTERPRETATION Recession impact BPO industry sees dip in attrition rates. Firms hire in smaller number to cut costs. Wipro BPO the quarterly attrition has comes down by 500 basis points to 13% from 18% in the previous sequention quarter In the above graph the wipro future price is 383.25 approximately at that time the Open interest in 3520 crores. Later the future price and open interest rose up due to creation of long position. After that the price is drastically fall down because the impact of Global markets.

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Data for FUTSTK-RELIANCE 01-04-2011 TO 28-04-2011

Turnover in Date 01-Apr11 04-Apr11 05-Apr11 06-Apr11 07-Apr11 08-Apr11 11-Apr11 13-Apr11 15-Apr11 18-Apr11 19-Apr11 20-Apr11 21-Apr11 25-Apr11 26-Apr11 27-Apr11 Expiry 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 28-Apr11 Open 1054 1045.8 1060 1051.65 1050 1047.3 1020.5 1005.5 1022.25 1021.3 1010.5 1020.05 1034.5 1015 1012 1009.7 High 1071.15 1062.8 1063.8 1060.4 1051.65 1055.4 1024.3 1029.8 1026.45 1048.6 1021.8 1033 1048.45 1026 1012.8 1009.9 Low 1040 1034.05 1044.5 1043.8 1040.45 1025.65 1010 1001 1010.25 1010.55 1002.1 1010.9 1032.8 1009.1 998.7 982 Close 1043.95 1057.9 1052.3 1049.5 1045.65 1028.75 1010.95 1027.6 1022.75 1014.25 1016.05 1030.4 1044.8 1012.3 1004.65 987.25 LTP 1043.4 1059.95 1051.75 1051.9 1045 1029.05 1011.6 1028.1 1020.4 1012.85 1014.5 1032.2 1044 1012 1003.95 989 Settle Price 1043.95 1057.9 1052.3 1049.5 1045.65 1028.75 1010.95 1027.6 1022.75 1014.25 1016.05 1030.4 1044.8 1012.3 1004.65 987.25 Lacs 46116.45 41164.61 30264.18 31251.06 22307.57 34020.39 24395.68 48580.62 37337.23 59510.32 46284.72 35735.3 50207 69216.01 72114.04 49706.89 Underlying Value 1036.4 1050.65 1047.65 1044.85 1041.9 1023.9 1005.3 1021.8 1020.95 1009.15 1011.65 1025.9 1040.6 1009.35 1001.15 986.1

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GRAPH FUTSTK-RELIANCE from 01-04-2011 to 28-04-2011

ANALYSIS & INTERPRETATION From the above graph market opening price has rise in the beginning but there in downfall in open interest due to profit booking of investors. At the middle of the month future price fall down drastically but open interest is slightly down due to heavy selling. At the end future price rise up but open interest has been drastically fall down due to the creation of short position Reliance this month is having high volatility due to the high expectation on the budget

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FINDINGS Steel City Securities Limited established in the year 1995 is a stock broking company operating in Andhra Pradesh, Orissa, Karnataka and TamilNadu. In SCSL, trading in NSE, BSE, NCDEX, MCX and MCX-SX is done on different terminals. Trading in NSE is done through National Exchange for Automated Trading (NEAT) system.

In this month market rise up from 18thMay and to 7th June, it is falling from 8th june and get, back to the positive trends in the market. The reason for the Nifty rise is due to positive results of elections.The particular day is called as GOLDEN MONDAY

As soon as the trade ends, back office system is done in SCSL to know the trade
positions.

From 2001 to till now derivatives has grown tremendously. Indian markets are literally on the top of the world,going their returns so far in 2009. In the month of june,the share price of wipro was drastically fall down because of
due to the impact of global market.

At the end of may contract the Chambal fertilizers, open interest was fall down,but
the price is swings due to heavy profit booking.

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SUGGESTIONS
In order to increase its customer base SCSL. Has to educate the existing and new

investors through awareness programs, which can be conducted periodically.


For an effective trading process SCSL should provide more and perfect sources of

information for the investors or traders.


There is a need to create awareness in the women/housewife investors in order to

make the capable of entering into the securities market.


SCSL can increase its business by reaching more potential investors by appointing

sales persons and proper advertisements and setting up new branches in potential areas.
It would be more advantageous for SCSL if it can explore global stock markets like

NASDAQ by introduction of a terminal.


To overcome the competition from other companies SCSL must offer better

service for the investors and provide good infrastructure for the investors.In addition to that they need to issue identity cards for better recognition.
A Griveance cell must be opened and meeting must be conducted for every 15

days.so that investors can put forward their problems and it can get resolved.

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SUMMARY The focus of the study was on Online Trading in Steel City Securities Limited, Visakhapatnam with an objective to study and understand the real process of stock trading. The on-line trading in NSE is done through National Exchange for Automated Trading (NEAT) system. Trading is done in the 2 types of markets of the NEAT system namely capital market and derivatives market. SCSL, which was set up in November 1995, is a stock broking company. It is a trading member of NSE, BSE, MCX and NCDEX. Screen based trading system electronically matches the buyer and seller in an order-driven system or finds the customer the best price available in quote driven system. Today, in India almost 100% trading takes place through electronic order matching. In online trading Back Office provide the clients with all the trading related services in the post market session.

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CONCLUSION
This study is about what is an derivative market, different financial instruments that will be available for trading, its derivative terminology, what is a equity market, the instruments available for trading , the monitoring and controlling authority of equity and derivative markets. It includes the online mode of trading with stock exchanges like NSE & BSE, analysis of various service providers for online trading and the differentiating factors or different products and services offered, comparative to steel city securities limited. Superiority of steel city securities limited over its competitors particularly with special reference to scsl.com Visakhapatnam Branch was analysed.

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BIBLIOGRAPHY

I. BOOKS

1. 2.

Derivatives core module work book National stock exchange Future, options and other derivatives products John.C.hull

II. REPORTS
1. STEEL CITY SECURITIES LTD - Annual Report

III. JOURNALS & MAGAZINES


1. Business line 2. Hindu 3. India today

IV. WEB-SITES
1. 2. 3. 4. 5. 6.

www.nseindia.com www.bseindia.com www.moneycontrol.com www.scsl.com www.sebi.gov.in www.derivativesindia.com

ABBREVATIONS ALBM BSE CDSL CMs CM-BP-ID Automated Lending & Borrowing Mechanism Bombay Stock Exchange Central Depositary Services Limited Clearing Members Clearing Member Business Partner Identification
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number DI DP DRF FIIs ISIN IPO LAN NBFCs NCFM NEAT NSCCL NSDL NSE RAS SCSL SCCSPL SCCPL SEBI SEBI Act SHCIL TWS VSAT WAN Delivery Instructions Slip Depository Participant Dematerialisation Request Form Foreign Institutional Investors International Securities Identification Number Initial Public Offer Local Area Network Non - Banking Finance Companies National Certification in Financial Market National Exchange for Automated Trading National Securities Clearing Corporation Limited National Securities Depository Limited National Stock Exchange Remote Access Service Steel City Securities Limited Steel City Capital Services Private Limited Steel City Commodities Private Limited Securities and Exchange Board of India Securities and Exchange Board of India Act Stock Holding Corporation of India Limited Trading Work Station Very Small Aperture Terminal Wide Area Network

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