A Project Report On A Study On Derivatives in Volatile Market Condition

A Study on Derivatives in Volatile Market Condition
CONTENTS SNO
1 2 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5 6 6.1 6.2 7
PARTICULARS
ABSTRACT INTRODUCTION ABOUT COMPANY INTRODUCTION ABOUT DERIVATIVES ISSUES IN DERIVATIVES SYSTEMATIS RISK BASIC RISK COUNTERPARTY RISK FINANCIAL DERIVATIVES DEFINITION TYPES OF DERIVATIVES FORWARD CONTRACTS FUTURES CONTRACT FUTURES TERMINOLOGY PERMITTED LOT SIZES OF CONTRACT OPTIONS CONTRACT OPTIONS TERMINOLOGY VOLATILE MARKET CHARACTERISTICS OF VOLATILE MARKET VOLATILITY IS CYCLICAL VOLATILITY IS PERSISTENT IDENTIFICATION OF VOLATILE MARKET
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8 9 9.1 9.2 9.3 9.4 9.5 10 11 12 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 13 14 15 TYPES OF SECURITIES SCIENTIFIC METHOD INVOLVED IN IDENTIFYING SECURITY AVERAGE RANGE STANDARD DEVIATION BETA COEFFICIENT R- SQUARED GEOMETRIC STANDARD DEVIATION IDENTIFICATION OF SECURITIES COMPARISON OF SECURITIES WITH THE MARKET DERIVATIVE STRATEGY STRADDLE STRANGLE BULL SPREAD WITH CALL OPTION BEAR SPREAD WITH CALL OPTION BULL SPREAD WITH PUT OPTION BEAR SPREAD WITH PUT OPTION BOX SPREAD BUTTERFLY SPREAD WITH CALL OPTION BUTTERFLY SPREAD WITH PUT OPTION CALCULATION OF PAYOFF CONCLUSION REFERENCES
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RECOMMENDATIONS
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Abstract
The project began with the study of what derivative is and what are the types of derivatives that has been trading in India and I was taught the basics of future and option trading in India. After getting the basic knowledge about derivatives the project work started with Identification of volatile market Identification of securities - High volatile securities - Low volatile securities Comparison of securities with the market
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Strategies for volatile market Payoff calculation for the strategies Propose the best strategy for the volatile market condition
2. PROFILE OF STOCK HOLDING COPORATION OF INDIA LTD

INTRODUCTION
Flagged off at the initiative of the Government of India, SHCILenjoys an enviable parentage that includes leading Indian financial institutions and insurance majors like IDBI, UTI, ICICI, LIC GIC and its subsidiaries, IFCI and IIBI. Their original focus was to manage the entire array of post trade activities of Financial Institutions and Foreign Institutional Investors with dedicated client relationship teams and state-of-the-art reporting systems. It has been an eventful journey rewarding them with a 50% market share and the biggest investing bodies of the country for clients. From their inception to achieving and retaining the mantle of the largest Depository Participant in the country, it is their dream and vision that has helped them. Where they have made the difference is at understanding ideas, managing them, at arranging their organizational strengths and translating these new exposures into service and business activities. Their technological support not only holds enormous databases together, but makes sense and searvice out of it too. The State-of-the-art Information Technology tools deployed by SHCIL
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is a laureate of lthe computerworld Honors Program. SHCIL has also received National IT award from the Computer Society of India. Their adaptability to the changing requirement of the market is one of their main strengths. The biggest changeover in the SHCIL story has been expansion and diversification. Year 1996 marked a fundamental shift for the Indian capital markets. The Depository Act changed the way the capital market, specifically the stock exchanges, investors and related organization would function. Securities Exchange Board of India with its guiding Hand, set up a framework for changing over capital market investing and trading from paper to electronic mode. The depository culture has accelerated since then, probably unmatched by any other country. Accordingly, from servicing financial institutions, they have timed their move into the extensive individual investro populace. They have enriched their organisatinal strengths and fine-tuned the front-end interfaces to cater to the distinct needs of the individual investor. A specially trained pool of over 1500 professionals provides personalised service to their client investors. To enable easy reach, they have accelerated their distribution network from four offices in 1997 to over 100 offices across the country. Dedicated leaseline network links across these offices, independent systems setups and off-site backups provide the platform for traditional servicing as also for new e-commerce applications. The results are definite. Four years back, they signed in their first individual investor client. accounts. They ensure that their financial product offerings are related closely, not just disjointed services added on. Alongside expansion, the thinking has been at diversifying further into areas of financial products and services. Their new products are an echo of market requirements, customer feedback and needs. Rather than coming out with products which would suit their organisational needs, the accent is on channeling technology to make convenience products for financial markets. They formulate new products that give quantum benefits to linvestors, corporatins and brokers and also fit into the mosaic of their product mix. Glolbalisation of the market has led to a manifold increase in investment. New markets have been opened new instruments have been developed and new services have been launched. Besides, a number of opportunities and challenges have also been thrown open. Stock Holding Corporation of India Ltd.,(SHCIL), the premier custodian of Indian capital market providing services of international standards, is gearing up to reposition itself in the changed scenario. With world acclaimed automation and a team of committed professionals, SHCILis confident of scalilng new heights. Today, SHCIL serves a satisfied clientele of around seven lakh
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INTRODUCTION TO THE COMPANY
Stock Holding Corporation of India Ltd. (SHCIL) was incorporated under the Companies act 1956 at the initiative of the Government of India. It is promoted by the all India financial and investment institutions and insurance companies viz., IDBI, UTI, ICICI, IFCI, IBI, LIC, GIC, and its subsidiaries. SHCIL commenced operations in August 1988 and has been providing custodial and related services of international standards for nearly a decade to the promoter and other institution, Foreign Instiutional Investors (Flls), Commercial Banks and Mutual Funds. Being a premier custodian of the country. SHCIL today holds more than Rs. 80,000 crores worth of clients assets. The turnover of the corporation exceeds Rs.10,000 crores per annum. SHCIL has been earning profit and declaring dividend right from the inception. SHCIL already has securities worth Rs.26000 crores in electronic form. SHCIL is the first depository participant to be registered with the National Securities Depository Ltd.(NSDL). SHCIL offers the facility of operating beneficiary account for individuals and corporates as well as clearing account for brokers. This manual has been prepared exclusively for their account holder. accounts. It gives the overview of the depository system and explains in details, various operation relating to individual The aim is to impart to their account holders, knowledge about the working of depository system and facilitate a smooth transition from physical to electronic tradings. BRANCHES: SHCIL has a network of more than 120 branches spread across the country providing services at doorstep to their client with Head Office at Mumbai. In Karnataka there are 12 branches spread over the entire region.
MISSION To spread quality services through the innovative use of technology OBJECTIVES OF THE SHCIL 1. To eliminate paperwork and bring in front of electronic stock market (E-Stock Market) on India 2. To ensure satisfaction through teamwork and professional management.
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3. To extend effective guidance to brokers, to clearing house Corporation, companies and investor in E-Stock Trading 4. To provide good quality of services on a continuous basis to the satisfaction of clients 5. To encourage every one in the organization to upgrade and enhance there skills and knowledge in computerized environment. 6. To attain specified level of performance every year and ensure compliance with statutory requirements. PRODUCTS AND SERVICES SERVICES: CUSTODIAL SERVICES
Since its commencement in 1988 as the premier Custodian in the country, SHCIL has been providing Custodial Services of international standards to Financial Institutions, Foreign Institutional Investors and Domestic Mutual Funds. With almost 70% of the Institutional business to its credit, SHCIL has graduated to providing specialised services to large investing institutions. A dedicated pool of trained professionals working in interconnected offices across the country, linked to client institutions, Stock Exchanges, Depositories and brokers through state-of-the-art telecommunication channels, is at the helm of SHCIL's Custodial services Lodgements and Custodial Services SHCIL has specialized sections catering to all activities (lodgment, objections handling, followups, client reporting etc.) associated with the Lodgment of securities with the respective company and ensuring their quick transfer to the purchaser. On receipt of the transferred securities, securities are held in state-of-the-art, high-security vaults on behalf of the clients. A pioneer in introducing the bar-coding system to track certificates, SHCIL ensures the availability of each and every share certificate at a moments notice
Corporate Actions The Corporate Actions cell ensures timely collection of monetary and non-monetary benefits on behalf of the client. It covers all activities relating to Corporate Actions like calculation of
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entitlements, receipt of monetary Corporate Actions and transfer of the same to clients. Customized reporting to clients on the status of Corporate Actions is done periodically. The Primary Markets cell takes care of applications on behalf of clients for primary market issues, calculates the entitlements, follows up for allotment or refunds and sends customised reports to clients. Data Bank Services To serve clients, the Corporation requires a large amount of information from the Stock Exchanges, Depositories, SEBI, Companies and other entities of the capital market. The Databank department collects, compiles and maintains information that is required by the Corporation for carrying out market obligations. Databank maintains information of approximately 12,500 instruments, 8500 companies, 2500 Registrars, two Depositories and six Stock Exchanges namely BSE, NSE, OTCEI, DSE, CSE and MSE.
Databank also maintains the following data : a. Information regarding various scrips ( listed and unlisted) in which our clients have holdings. b. Information pertaining to book closures / record dates for corporate events, ex-dates and no delivery schedules for various Stock Exchanges. c. Details of monetary and non-monetary benefits. d. In the electronic segment, information such as ISIN data, the Registrars handling demat for a company, the scrips under compulsory demat trades as declared by SEBI, scrips included in compulsory rolling segment etc. are also maintained. e. NAV information of all Mutual Fund schemes Reporting - Custodial Services The Client Interface Cell is a single point contact for all Client Issues. Detailed, reconciled statements and customized reports are made available to clients periodically or as and when desired by the clients. Street Name Securities
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This is a special service offered to clients who wish to turn around their portfolio in a speedy manner. The securities purchased by the clients are not sent for registration, but are stored in the safe deposit vaults of the Corporation. Adequate measures are taken to ensure no benefit losses due to corporate events or any document expirations.
DEPOSITORY PARTICIPANT SERVICES

Introduction: Their Depository Participant services addresses individual investment needs. With a parentage of leading financial institutions and insurance majors and a proven track record in the Custodian business, they have reiterated their past success by establishing themselves as the first ever and largest Depository Participant in India From a tentative foray in 1998 into the individual investor arena to servicing around seven lakh accounts, the have endeavored to constantly add and innovate to make business a pleasure for their client. Over 100 of our networked branches ensure they are available where their client look out. Across the country, fourteen Depository Participant Machines (DPMs) connected to NSDL and seven connected to CDSL ensure fast and direct processing of clients instructions. Their customer-centric account schemes have been designed keeping in mind the investment psyche of their clients. A DP account with SHCIL takes care of clients Depository needs like dematerialisation, rematerialisation and pledging of shares. . At SHCIL, they place a very high premium on client reporting. Periodic statements sent to client keep them informed of their account status. Dedicated Customer Care lines manned by trained staff answer clients queries on demat / trades / holdings. The latest in client response at SHCIL is Interactive Voice Response (IVR) system for round the clock information on their account. Registration on theirr website, SHCIL Interactive, enables them to check their account-related information, stock market reports and statistics, Corporate benefits declared by companies, realtime quotes of scrips on BSE and NSE and so much more online. Demat Dematerialisation is the process of conversion of shares from physical form to the electronic mode. Their dedicated demat team enable the client to convert their physical holdings into electronic mode in a quick and hassle-free manner. As per SEBI, scrips can be divided as :
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Scrips eligible for demat. These scrips can be traded either in physical or electronic form Scrips falling under compulsory demat. Scrips can be traded only in electronic form. Scrips falling under transfer cum demat. In this category, the shares purchased by the client in the physical form can be sent to the Registrar / Company for transfer and dematerialisation at the same time. Process for Dematerialization / Rematerialization Once demat account of client is opened with SHCIL and have received their client identity number, they can start dematerialising their shares. They can submit the shares over the counter at any of their branches. When the company gives credit, those shares will reflect under "free" column in the Client ID. Now client can sell these shares. In case the company is not satisfied with the details furnished, it will reject the shares If the company has rejected Clients shares, SHCIL will forward the shares to Client on receiving them from the company.
CLEARING- MEMBERS SERVICES

Introduction SHCIL's long-standing association with Clearing Members has enabled it to develop services based on an understanding of their working and their requirement for timely and accurate information SHCIL accept deposits of base capital and Additional base capital requirements stipulated by NSE for clearing members trading on its capital market segment. Besides, their new products with a broker empanelment clause ensure a mutually beneficial tie-up. Clearing members stand to earn a steady income from their product transactions and this adds to their client-base, while they capitalize on their rapport with the market
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SHCIL currently offer Depository services to more than 680 clearing members of various exchanges connected with NSDL and CDSL.
Custodial Services for CM

Custodial services for Base Capital / Additional Capital requirements They accept deposits of Base Minimum Capital (Base Capital) and Additional Base Capital as stipulated by NSE for clearing members to be able to trade on its capital market segment. The securities being deposited shall be subject to legal and beneficial ownership of: TM clearing member / spouse in case of individuals. Any of the partners / their spouses in case of partnership Any of the directors in case of corporate TM clearing member.
NRI SERVICES
Over the years, SHCIL has grown to become a major player in the capital market. With a network of more than 120 offices operating across the country and franchisees operating abroad, SHCIL provides Depository Participant and related services close to 0.7 million satisfied investors out of which over 6000 are NRI Clientele. SHCIL has a full-fledged NRI cell operating specifically to cater needs pertaining to Depository account opening and maintenance. NRI cell co-ordinates with prospective NRI customers, collects and assists in obtaining the relevant documents and ensures the Depository Account is opened hassle free. NRI Cell collects physical certificates to be sent for demat and ensures that the certificates are in order and can be sent for dematerialization under the existing guidelines issued by the depositories. Instructions for trade are accepted by fax on request by NRI Cell to ensure timely settlement of trades. In this case later on the client needs to regularize by sending the original trade delivery instruction. NRI Cell addresses any tariff and billing related query. In short NRI Cell is a single point contact for any matter relating to NRI Depository operations.
PRODUCTS:
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ADD Shares
This is a product by which SHCIL arranges loans against demat shares for its clients at the competitive interest rates. They can use the shares in their free account as a collateral and take a loan from any of their empanelled banks. SHCIL complete documentation and processing and give the cheques within 48 hours of application to their clients. Features Loan against demat shares held in the DP account with SHCIL SHCIL processes the entire paperwork required with the bank. The service is available at any of over 100 branches of SHCIL.
CASH ON-PAYOUT
Usually client need to follow-up with their broker for the funds after they have sold their securities. When they sell through Cash-on-Payout, they give client a cheque on the next day of payout. Cash-on Payout is a variant of Sell-n-Cash and it comes in handy when you don't need immediate payment but at the same time are looking for an timely payment without delays. Cash on Payout has a very competitive service charge which may actually be lesser than what client is currently paying your broker.
FUND INVEST
Fund Invest is a basket of financial products, ranging from fixed income securities like Fixed deposits, Infrastructure bonds and Capital Gain Bonds to variable income securities like Initial Public Offers (IPOs) of Equities and Mutual Funds. This is a financial product that caters to the various investment needs of their clients. SHCIL is an AMFI Registered Mutual Fund Advisor (ARMFA). Features At present, they are distributing more than 25 schemes of different Mutual Funds Capital Gains Bonds come under 54 EC Capital Gains Bonds, where investors get exemption from Capital Gain tax. These are 'on -tap ' issues. At present, SHCIL is
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distributing Capital Gain Bonds of Rural Electrification Corporation, National Housing Bank, Small Industries Development Bank of India and National Highway Authority of India. Infrastructure Bonds are issued by ICICI Bank and IDBI, with Section 88 as the main feature.
Private Placements: Stock Holding distributes Debt papers issued for Private Placement with Structural Obligations by the State and Central Government, typically targeted for Trusts and Provident Funds.
Fixed Deposits: SHCIL distribute fixed Deposits with high investment rating and issued by blue- chip corporate. These papers generally offer 50 to 100 basis points more than bank fixed deposits of comparable period. At present, SHCIL are distributing IDBI Suvidha Fixed Deposits and HDFC Fixed Deposits.
Initial Public Offer: IPOs offered from blue chip corporate can be subscribed from Stock Holding. Issues recently distributed by SHCIL are NDTV, Maruti Udyog, Datamatics Solutions, ONGC etc..
GOI BONDS
RBI on behalf of Government of India issues Savings Bonds in two different series. 6.5% tax free bonds 8.0% taxable bonds
These Bonds are held in electronic form in an account called Bond Ledger Account (BLA). Bond Ledger Accounts can be opened and operated with RBI designated receiving Offices. RBI has designated SHCIL as one of the Receiving Offices for this purpose. Savings Bonds being sovereign in nature are absolutely safe and an attractive investment option in the current volatile market situation.
STOCK DIRECT
STOCK direct - India's first online trading platform was launched in 1999. Today STOCK direct is the most secure online trading platform which combines encryption technology / digital signature as well as Smart Card security features. Client can trade from home on the Internet with a floppy containing the STOCK direct software.
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For people who are not inclined to trading on the net, SHCIL has Request Transmitting Machines (RTMs) placed at specified SHCIL centers. This is an electronic touch screen kiosk where you can insert your smart card and trade effortlessly.
STOCK LENDING
SHCIL has been granted the approval to act as Approved Intermediary by SEBI in April, 1998. If client is the lender, client retain all the benefits of ownership other than voting rights. Through Stock lending, your holdings that SHCIL manage, can be temporarily transferred to a third party to earn a fixed income for client. As a borrower, a person can utilize borrowed securities the way he want provided he return the securities along with the accrued benefits at the end of the loan period. Securities deposited with SHCIL by the investors for lending will not be treated as sale and hence will not attract any capital gains tax. The interest income received will be taxed like any other income. Flexible period of borrowing is available from 4 days to 84 days. Securities deposited with SHCIL for lending will not attract any custody charges during the period the securities are lent. But this year the lending license of SHCIL is not renewed by the SEBI.
Introduction about derivatives
The technical definition is 'a financial contract the value of which is derived from the value of another (underlying) asset, such as an equity, bond or commodity.' Derivatives have been around for a long time, though without stirring much controversy. Forward contracts were used by Flemish traders in the 12th century. Contracts resembling today's futures and options were widely used in the 17th century in Amsterdam, Babasabbpatilfreepptmba.com
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when it was the financial capital of the western world, and at about the same time in Osaka's rice market. Organized commodity-futures exchanges were set up in Chicago and New York in the middle of the 19th century. 'Complex' financial instruments are nothing new either. In a quarter of a century the global financial marketplace has undergone a transformation equivalent to replacing a village shop with a shopping mall. In 1986 the total outstanding value of derivatives markets was just over $ 1 trillion; in 1994 it was $ 20 trillion Derivatives have flourished because a series of recent developments have transformed them into a cheap and efficient way of moving risk about within the economic system. After the collapse of the Bretton Woods fixed-exchange-rate regime in the early 1970s, floating exchange rates fuelled demand for ways to cope with the resulting currency risk. This led to the development of exchange-traded foreign-exchange futures in Chicago, a successful innovation that was to spawn many more. The availability of large, low-cost computing capacity was also vital, as pricing some derivatives involves complex numbercrunching.
Issues in derivatives
The three separate issues in derivatives are as follows: How well the buyer understands what the derivative does; What the derivative is being used for What risks are inherent in the derivative itself?
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The first two questions are really about the qualities of the buyer rather than of the product. Many so-called derivatives disasters are in fact speculative disasters that might just as easily have happened if the investor had been punting in shares or equity. Of the risks associated with derivatives themselves, the one that gets the most headlines is Systemic risk
The possibility that loss on a derivative contract might cause a bank to go bust, producing knock-on effects throughout the global financial system. This has given nightmares to financial regulators around the world. To improve the quality of their sleep, they have already demanded fuller disclosure of banks' derivative activities and required them to put aside capital to cover potential losses. Further controls are in the pipeline. Derivatives, however, are by no means the only source of systemic risk. Fears of systemic collapse have also been raised recently by the third-world debt crisis and by the collapse of the developed world's commercial-property market. Moreover, although some critics have blamed derivatives for increasing volatility in financial markets (and, among other things, causing the 1987 stock market crash), most investigations into such claims have exonerated them. Indeed, it now looks more likely that it was the volatility in financial markets that boosted demand for derivatives, and that by reducing that volatility they actually lessened systemic risk.
Non-financial firms need to watch out for three main risks when using derivatives. They are as follows
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3.3 Market risk The possibility that the value of the derivative will change. This is essentially no different from the risk involved in buying an equity or bond, or holding a currency - except that the market risk may be magnified many times if the derivative is leveraged; indeed some of the most famous disasters, including Procter & Gamble's losses, were associated with leveraged products. The other difference compared with equities, bonds and so on is that the value of an option changes increasingly quickly as it becomes more likely to be exercised. Basis risk
The derivative used may not be a perfect match with whatever it is intended to hedge, so that when the value of the underlying asset falls, the value of the derivative may not raise by the expected amount.
Credit or 'Counterparty' risk:
The institution concerned will get into trouble and be unable to pay up. Bear in mind, however, that the credit risk on buying a derivative is less than that on, say, making a loan, as the cost of replacing a derivative contract is only the amount to which the market has moved against the buyer since the original contract was drawn up, whereas for the loan it is the entire amount lent.
Derivatives bought from banks are exposed to bigger credit risks than those bought from exchange. This is because exchanges guarantee contracts, and, unlike banks, ensure they can cover them by requiring traders to stump up cash ('post-margin') to cover potential Babasabbpatilfreepptmba.com
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losses in advance. However, this increases the possibility that a firm might face liquidity problems. If there is any doubt about the financial strength of the firm selling a derivative, the best advice is to leave well alone. Derivatives have brought a neat twist to the relationship between firms and their banks. Increasingly companies, used to having their quality as clients investigated by their banks, are instead sitting in judgment over their banks.
Financial Derivatives Definition
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Financial derivative is a financial instrument whose pay-offs depends on a more primitive or fundamental good. For example a gold futures contract is a derivative instrument, because the value of the future contract depends on the value of the gold that underlies the futures contract. The value of the gold is the key since the value of the gold future contract derives from the value of underlying gold. Types of derivatives
Forward Futures Options Swaps
Forward contract A forward contract is an agreement between two parties that commits one to sell and the other to buy a stipulated quantity and grade of a commodity, currency, security, index or other specified item at a set price on or before a given date in the future.
Futures contract It involves an obligation on both the parties (i.e.) the buyer and the seller to fulfill the terms of the contract (i.e.) these are predetermined contracts entered today for a date in future.
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Futures terminology
Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month, two-months and three-month expiry cycles which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading.
Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist.
Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices.
Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset.
Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.
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Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. This is called markingtomarket. 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. Contract size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures market is 200 Nifties.
Permitted Lot Sizes of Contracts
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No. Underlying 1 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
S&P CNX Nifty CNX IT
Symbol NIFTY CNXIT ACC ARVINDMILL BAJAJAUTO BANKINDIA BEL BHEL BPCL CANBK CIPLA DRREDDY GAIL GRASIM GUJAMBCEM HCLTECH
Finance
Market Lot 200 100 1500 4300 400 3800 550 600 550 1600 1000 200 1500 350 1100 1300 600 800 400 300 2000 650 1400 300
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Derivatives on Individual Securities

Associated Cement Co. Ltd. Andhra Bank Arvind Mills Ltd. Bajaj Auto Ltd. Bank of Baroda Bank of India Bharat Electronics Ltd. Bharat Heavy Electricals Ltd. Bharat Petroleum Corporation Ltd. Canara Bank Cipla Ltd. Dr. Reddy's Laboratories Ltd. GAIL (India) Ltd. Grasim Industries Ltd. Gujarat Ambuja Cement Ltd. HCL Technologies Ltd. Housing Development
ANDHRABANK 4600
BANKBARODA 1400
Corporation Ltd. HDFC Bank Ltd. Hero Honda Motors Ltd. Hindalco Industries Ltd. Hindustan Lever Ltd. Hindustan Petroleum Corporation Ltd. ICICI Bank Ltd. I-FLEX Solutions Ltd.
HDFC HDFCBANK HEROHONDA HINDALC0 HINDLEVER HINDPETRO ICICIBANK I-FLEX

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53
Infosys Technologies Ltd. Indian Petrochemicals Corpn. Ltd. Indian Oil Corporation Ltd. ITC Ltd. Jet Airways (India) Ltd. Mahindra & Mahindra Ltd. Maruti Udyog Ltd. Mastek Ltd. Mahanagar Telephone Nigam Ltd. National Aluminium Co. Ltd. National Thermal Power
INFOSYSTCH IPCL IOC ITC JETAIRWAYS M&M MARUTI MASTEK MTNL NATIONALUM NTPC ONGC ORIENTBANK PNB POLARIS RANBAXY REL RELIANCE SBIN SCI SYNDIBANK TCS TATAPOWER TATATEA TISCO UNIONBANK WIPRO
200 1100 600 300 200 625 400 1600 1600 1150 3250 300 1200 1200 1400 400 550 600 500 1600 7600 250 800 550 1350 4200 600
Corporation Ltd. Oil & Natural Gas Corp. Ltd. Oriental Bank of Commerce Punjab National Bank Polaris Software Lab Ltd. Ranbaxy Laboratories Ltd. Reliance Energy Ltd. Reliance Industries Ltd. Satyam Computer Services Ltd. State Bank of India Shipping Corporation of India Ltd. Syndicate Bank Tata Consultancy Services Ltd Tata Power Co. Ltd. Tata Tea Ltd. Tata Motors Ltd. Tata Iron and Steel Co. Ltd. Union Bank of India Wipro Ltd.
SATYAMCOMP 1200
TATAMOTORS 825
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Options contract It is a contract that goes a step further and provides the buyer of the option a right without any obligation to fulfill the terms of the contract. Key features of an options contract Gives right to buy or sell It is not an obligation Consideration is by paying a premium Quantity is defined
Option terminology
Index options: These options have the index as the underlying. Some options are European while others are American. Like index futures contracts, index options contracts are also cash settled.
Stock options: Stock options are options on individual stocks. 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.
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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. In-the-money option: An in-the-money (ITM) option is an option that would lead to a positive Cash flow to the holder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price.
At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is at-themoney when the current index equals the strike price (i.e. spot price = strike price).
Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negative cash flow. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price.
Volatile markets
Volatile markets are characterized by wide price fluctuations and considerable trading volume. Babasabbpatilfreepptmba.com
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Reason for volatile market condition
Few reasons for market volatility are: Change in interest rate policy. Arbitrage causes volatility. Arbitrage is the simultaneous or almost simultaneous buying and selling of an asset to profit from price discrepancies. Arbitrage causes markets to adjust prices quickly. This has the effect of causing information to be more quickly assimilated into market prices. This is a curious result because arbitrage requires no more information than the existence of a price discrepancy. Another obvious reason for market volatility is dissemination of information and technology factors. This includes more timely information dissemination, improved technology to make trades and more kinds of financial instruments. The faster information is disseminated, the quicker markets can react to both negative and positive news. Improved trading technology makes it easier to take advantage of arbitrage opportunities, and the resulting price alignment arbitrage causes. Finally, more kinds of financial instruments allow investors more opportunity to move their money to more kinds of investment positions when conditions change. Most people would say that new information in general causes volatility
Characteristics of high volatile market
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Volatility has certain characteristics. They are as follows Cyclical Persistency Mean reversion.
Volatility is cyclical
Volatility tends to run in cycles, increasing and peaking out, then decreasing until it bottoms out and begins the process all over again. Many traders believe volatility is more predictable than price (because of this cyclical characteristic) and have developed models to capitalize on this phenomenon.
Volatility is persistent
Persistency is simply the ability of volatility to follow through from one day to the next, suggesting the volatility that exists today will likely to exist tomorrow. That is, if the market is highly volatile today, it will most likely be volatile tomorrow; conversely, if the market not volatile today it will likely not be volatile tomorrow. By the same token, if volatility is increasing today, it will likely continue to increase tomorrow, and if volatility is decreasing today, it will likely continue to decrease tomorrow.
Identification of volatile market
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The market is highly volatile for the month of January & February in the year 2005, so I had taken these periods as a highly volatile market for my study. The details of indices for the period are as follows. JANUARY INDEX MOVEMENTS
Date 3-Jan-05 4-Jan-05 5-Jan-05 6-Jan-05 7-Jan-05 10-Jan-05 11-Jan-05 12-Jan-05 13-Jan-05 14-Jan-05 17-Jan-05 18-Jan-05 19-Jan-05 20-Jan-05 24-Jan-05 25-Jan-05 27-Jan-05 28-Jan-05 31-Jan-05
Open 2080 2116.95 2103.75 2031.55 1998.25 2016.75 1982.7 1953.6 1922.5 1954.9 1931.75 1933.05 1934.1 1928.1 1925.3 1908.85 1931.9 1955.25 2008.45
High 2118.6 2120.15 2105.1 2035.65 2021.45 2025.9 1988.9 1966.65 1963.4 1961.4 1944.55 1956.95 1945.65 1940.95 1932.75 1934.25 1961.75 2014.25 2060.4
Low 2080 2100.55 1990.15 1984.25 1992.55 1974.8 1947.35 1900.85 1916.95 1922.85 1902.45 1925.35 1922.35 1900.05 1902.9 1894.4 1929 1950.85 2006.35
Close 2115 2103.75 2032.2 1998.35 2015.5 1982 1952.05 1913.6 1954.55 1931.1 1932.9 1934.05 1926.65 1925.3 1909 1931.85 1955 2008.3 2057.6
On these above dates the market is highly volatile on January 31st Market movements in the month of January
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2135 2110 2085 market movements 2060 2035 2010 1985 1960 1935 1910 1885 1860 4-Jan-05 5-Jan-05 6-Jan-05 7-Jan-05 10-Jan-05 11-Jan-05 12-Jan-05 13-Jan-05 14-Jan-05 17-Jan-05 18-Jan-05 19-Jan-05 20-Jan-05 24-Jan-05 25-Jan-05 27-Jan-05 28-Jan-05 31-Jan-05
date
Market movement on January 31st
31-Jan-05 2080 2060 2040 2020 2000 1980 1960 1 2 3 4 31-Jan-05
February index movements Babasabbpatilfreepptmba.com

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Date 1-Feb-05 2-Feb-05 3-Feb-05 4-Feb-05 7-Feb-05 8-Feb-05 9-Feb-05 10-Feb-05 11-Feb-05 14-Feb-05 15-Feb-05 16-Feb-05 17-Feb-05 18-Feb-05 21-Feb-05 22-Feb-05 23-Feb-05 24-Feb-05 25-Feb-05 28-Feb-05
Open 2057.75 2062.15 2052.35 2079.4 2097.45 2055 2055.2 2070.1 2063.35 2083.05 2098.25 2090 2069.1 2062.45 2055.15 2043.4 2058.7 2057.75 2057.3 2061.2
High 2072.5 2074.5 2083.75 2099.2 2098 2065 2077.7 2075.1 2084.5 2110.15 2101.6 2103.4 2069.15 2076.7 2065.75 2061.65 2065.15 2070.5 2081.85 2106.2
Low 2045.25 2045.5 2052.35 2060.8 2049.85 2043.6 2055.2 2049.85 2063.35 2083.05 2081.2 2059.45 2045.85 2048.85 2039.9 2036.6 2051.35 2052.4 2051.2 2047.7
Close 2059.85 2052.25 2079.45 2077.95 2055.1 2055.15 2070 2063.35 2082.05 2098.25 2089.95 2068.8 2061.9 2055.55 2043.2 2058.4 2057.1 2055.3 2060.9 2103.25
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Identification of volatile market
Difference Difference between Open Date 1-02-05 2-02-05 3-02-05 4-02-05 7-02-05 8-02-05 9-02-05 10-0205 11-0205 14-0205 15-0205 16-0205 17-0205 18-0205 21-0205 22-0205 23-0205 24-0205 2090 2069. 1 2062. 45 2055. 15 2043. 4 2058. 7 2057. 75 2070.5 12.75 0.616% 2052.4 -5.35 -18.1 2055.3 2065.15 6.45 0.312% 2051.35 -7.35 -13.8 2057.1 2061.65 18.25 0.885% 2036.6 -6.8 -25.05 2058.4 2065.75 10.6 0.513% 2039.9 -15.25 -25.85 2043.2 2076.7 14.25 0.686% 2048.85 -13.6 -27.85 2055.6 2069.15 0.05 0.002% 2045.85 -23.25 -23.3 2061.9 2103.4 13.4 0.63% 2059.5 -30.55 -44 2069 Open 2057. 75 2062. 15 2052. 35 2079. 4 2097. 45 2055 2055. 2 2070. 1 2063. 35 2083. 05 2098. 25 2101.6 3.35 0.159% 2081.2 -17.05 -20.4 2090 2110.15 27.1 1.284% 2083.05 0 -27.1 2098.3 2084.5 21.15 1.015% 2063.35 0 -21.15 2082.1 2075.1 5 0.241% 2049.85 -20.25 -25.25 2063.4 2077.7 22.5 1.083% 2055.2 0 -22.5 2070 2098 2065 0.55 10 0.026% 0.484% 2049.85 2043.6 -47.6 -11.4 -48.15 -21.4 2055.1 2055.2 2099.2 19.8 0.943% 2060.8 -18.6 -38.4 2078 2083.75 31.4 1.507% 2052.35 0 -31.4 2079.5 2074.5 12.35 0.595% 2045.5 -16.65 -29 2052.3 2072.5 14.75 0.712% 2045.25 -12.5 -27.25 2059.9 High and High Percentage Low between Open Low and Difference between High and Low Close
Babasabpatilfreepptmba.com

25-02-05 28-02-05 2057.3 2061.2 2081.85 2106.2 24.55 45 1.179% 2.13% 2051.2 2047.7 -6.1 -13.5 -30.65 -58.5 2060.9 2103
opDate close %ge 0.102% -0.482% 1.303% -0.070% -2.061% 0.007% 0.715% -0.327% 0.898% 0.724% -0.397% 1-02-05 2.1 2-02-05 -9.9 3-02-05 27.1 4-02-05 -1.45 7-02-05 -42.35 8-02-05 0.15 9-02-05 14.8 10-0205 11-0205 14-0205 15-0205 16-0205 17-0205 18-0205 21-0205 22-0205 23-0205 -6.75 18.7 15.2 -8.3 -21.2 -7.2 -6.9 -11.95 15 -1.6
hi close -12.65 -22.25 -4.3 -21.25 -42.9 -9.85 -7.7 -11.75 -2.45 -11.9 -11.65
- lowclose 14.6 6.75 27.1 17.15 5.25 11.55 14.8 13.5 18.7 15.2 8.75 9.35 16.05 6.7 3.3 21.8 5.75
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1.025% -34.6 -0.349% -0.336% -0.585% 0.729% -0.078% -7.25 -21.15 -22.55 -3.25 -8.05

24-0205 25-0205 28-0205 -2.45 3.6 42.05 -0.119% 0.175% -15.2 -20.95 2.9 9.7 55.55
1.999% -2.95
Market movements in the month of February

M a rk e t M o v e m e n ts
2120 2110 2100 2090 2080 Nifty 2070 2060 2050 2040 2030 2020
2/1 /0 2/2 5 /0 2/3 5 /0 2/4 5 /0 2/5 5 /0 2/6 5 /0 2/7 5 /0 2/8 5 /0 2/9 5 /0 2/1 5 0/0 2/1 5 1/ 2/1 05 2/ 2/1 05 3/ 2/1 05 4/ 2/1 05 5/ 2/1 05 6/ 2/1 05 7/ 2/1 05 8/ 2/1 05 9/ 2/2 05 0/ 2/2 05 1/ 2/2 05 2/ 2/2 05 3/ 2/2 05 4/ 2/2 05 5/ 2/2 05 6/ 2/2 05 7/ 2/2 05 8/0 5
Da t e
In the month of February the market is highly volatile on february28th Market movement on February 28th Babasabbpatilfreepptmba.com
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28-Feb-05
2120 2110 2100 2090 2080 2070 2060 2050 2040 2030 2020 2010 1
2106.2
2103.25
2061.2 2047.7
28-Feb-05
Types of securities
Highly volatile securities Non volatile securities
Scientific methods involved in identification of securities
There are several different ways of measuring volatility Beta calculation of securities. Standard deviation Geometric standard deviation Beta coefficient R-squared 10-day average true range (ATR).
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Average range (high low) True range
Average range
One of the easiest ways is to take the average range (high low) over a given period. The number of days (or hours, or weeks, etc.) will give a picture of the volatility over that time period. A five-day average range calculation will give an idea of how volatile the market has been the past week, but it won't reflect anything about the past six months. A 100-day average range calculation would reflect volatility over a much longer period. . Standard Deviation The most common and basic measure of volatility is called standard deviation, where volatility is measured in relation to a defined time frame. It takes into account the way a security has performed in the past, and estimates the probability as the whether it will perform in the same manner in the future. The most common way to calculate standard deviation is to determine the deviation from an average monthly return over a 36-month time period, and then annualize that number. As a general rule, the higher the standard deviation, the more volatile the security. However, standard deviation is not a 'relative measure', and has no base reference point by which to compare. Thus, the logical way to use standard deviation is to compare one security's standard deviation to that of a similar security.
The Beta Coefficient
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Beta is used to measure the volatility of a security in relation to that of the stock market as a whole. To determine the beta of any security, you need to know the security's monthly returns and the returns of a benchmark index. For stocks and mutual funds that hold stocks, the Standard & Poor's 500 Stock Index is the most frequently used index, and is assigned a beta coefficient of one (1.0). For bonds and bond mutual funds, the Lehman Brothers Aggregate Bond Index is the most prevalent benchmark, and is also assigned a beta coefficient of one also. Any security with a beta higher than one is more volatile than the relative market index, while any security with a beta less than one is less volatile than the index. Like standard deviation, beta is typically measured using data over a 36-month period. Beta is useful in providing a measurement of a security's past volatility relative a specific benchmark or index, but it's important to verify that the most relevant benchmark is used.
R-Squared Whenever beta is used to measure volatility, you are likely to find an R-squared statistic as well. Where the beta coefficient to measure volatility, R-squared measures the reliability of the information used to determine beta. The lower the R-squared figure (on a scale of 1 100), the less reliable the information.
Geometric Standard Deviation It has become customary in the Mechanical Investing community to measure volatility with a statistic known as the Geometric Standard Deviation (GSD), which is defined as the exponential of the annual volatility: GSD = exp[ ]. Babasabbpatilfreepptmba.com
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The notation GSD(M) is occasionally used to indicate that the GSD was calculated from monthly data. By extension, the notations GSD(A) and GSD(D) mean that the GSD was calculated from annual and daily data, respectively. Needless to say, GSD(A) is highly unreliable because of the paucity of data from which it is calculated. In a later section we shall see exactly how reliable these measures are, by studying their sampling variation. By convention, CAGR and GSD figures are reported in "percentage" terms, where the following relationships apply: CAGR% = 100( CAGR 1 ), GSD% = 100( GSD 1 ). To summarize, when setting out to measure volatility or growth, three decisions need to be made in advance: (a) the units in which time is measured, (b) the number of observations per time unit, and (c) whether the result is to be given in instantaneous or annualized form. Confusion can be avoided only when all three decisions are made with total clarity.
Identification of securities
Securities identification for the month of January UNDERLYING DAILY DATE 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 SYMBOL UNDERLYING ANNUALISED VOLATILITY VOLATILITY 92.15848 88.922 78.77165 70.66948 74.69487 64.35369 62.67515 59.27882 57.75064 7.679874 7.410167 6.564304 5.889123 6.224572 5.362807 5.222929 4.939901 4.812553 2.85607767 2.75577675 2.44120725 2.19011308 2.31486433 1.99438117 1.94236208 1.83710633 1.78974625
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BANKINDIA 4.823796 SYNDIBANK 4.65439 ANDHRABANK 4.123097 ARVINDMILL 3.69901 CANBK 3.909708 UNIONBANK 3.368426 BANKBARODA 3.280567 MASTEK 3.102795 POLARIS 3.022807

31-1-05 TATAPOWER 31-1-05 SCI 31-1-05 ORIENTBANK 31-1-05 SBIN 31-1-05 PNB 31-1-05 GAIL 31-1-05 CIPLA 31-1-05 MARUTI 31-1-05 NATIONALUM 31-1-05 NTPC 31-1-05 HINDPETRO 31-1-05 REL 31-1-05 ITC 31-1-05 HDFCBANK 31-1-05 GUJAMBCEM 31-1-05 MTNL 31-1-05 I-FLEX 31-1-05 HEROHONDA 31-1-05 SATYAMCOMP 31-1-05 M&M 31-1-05 IPCL 31-1-05 ACC 31-1-05 ICICIBANK 31-1-05 RANBAXY 31-1-05 BPCL 31-1-05 TISCO 31-1-05 WIPRO 31-1-05 BAJAJAUTO 31-1-05 TATAMOTORS 31-1-05 TATATEA 31-1-05 BEL 31-1-05 INFOSYSTCH 31-1-05 HCLTECH 31-1-05 DRREDDY 31-1-05 HINDALC0 31-1-05 IOC 31-1-05 BHEL 31-1-05 RELIANCE 31-1-05 CNXIT 31-1-05 HINDLEVER 3.248215 2.991383 2.688226 2.605544 3.412083 2.659431 2.519124 2.634009 2.364218 2.404578 2.309823 2.616271 2.646245 2.551352 2.592657 2.898799 2.359378 2.654795 2.405864 2.192303 2.045748 2.292868 1.919359 2.253274 2.443998 2.029524 2.121333 2.21483 1.993018 1.825975 1.643575 1.897003 1.798322 1.742509 1.810941 1.626786 1.888885 1.60721 1.677221 1.752933 62.05706 5.171422 1.92320667 57.15029 4.762524 1.77114075 51.3585 4.279875 1.59164858 49.77885 4.148238 1.54269367 65.18775 5.432313 2.02022967 50.80836 4.23403 1.57459883 48.12779 4.010649 1.49152542 50.32266 4.193555 1.55954617 45.16832 3.764026 1.39980833 45.9394 3.828283 1.42370492 44.12911 3.677425 1.36760242 49.98378 4.165315 1.54904392 50.55644 4.213036 1.56679133 48.7435 4.061959 1.5106065 49.53263 4.12772 1.5350625 55.38148 4.615123 1.716324 45.07586 3.756321 1.39694333 50.71978 4.226649 1.57185358 45.96397 3.830331 1.42446708 41.88389 3.490324 1.29802092 39.08396 3.256997 1.21124867 43.80519 3.650432 1.35756433 36.6693 3.055775 1.13641608 43.04873 3.587394 1.33412025 46.69252 3.891043 1.44704508 38.77401 3.231168 1.2016435 40.528 3.377334 1.25600067 42.31426 3.526189 1.3113585 38.07656 3.173047 1.18002867 34.8852 2.9071 1.08112483 31.40046 2.616705 0.97312967 36.24219 3.020183 1.12317967 34.35689 2.863074 1.06475183 33.29059 2.774216 1.03170658 34.59798 2.883165 1.07222425 31.07971 2.589976 0.96318983 36.0871 3.007259 1.11837367 30.7057 2.558808 0.95159833 32.04326 2.670271 0.99305025 33.48973 2.790811 1.03787808
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31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 31-1-05 GRASIM TCS HDFC NIFTY ONGC NSE10YZC NSETB91D NSE10Y06 1.585475 1.591563 1.752687 1.413499 1.254692 0.734767 0.517025 0.51106 30.29046 30.40678 33.48504 27.00486 23.97086 14.0377 9.877749 9.763789 2.524205 2.533898 2.79042 2.250405 1.997571 1.169808 0.823146 0.813649 0.93872975 0.94233492 1.03773267 0.83690625 0.74287925 0.43504133 0.30612075 0.30258908
FUTURES VOLATILITY FUTURES ANNUALISED VOLATILITY Final volatility
4.809467 4.739768 4.216492 3.811807 3.826831 3.514454 3.41875 3.247103 3.1744 3.158247 3.027994 2.86699 2.802188 3.031505 2.698241 2.593143 2.604842 2.49412 2.4841 2.447403 2.538711 2.547011 2.506722 2.521281 2.630356 2.401469
91.88475 90.55314 80.55597 72.82448 73.1115 67.14355 65.31514 62.03581 60.64683 60.33822 57.84974 54.77377 53.53572 57.91683 51.54982 49.54193 49.76544 47.6501 47.45866 46.75758 48.50201 48.66057 47.89086 48.16902 50.25288 45.88001
7.657062 7.546095 6.712998 6.068706 6.092625 5.595296 5.442928 5.169651 5.053902 5.028185 4.820811 4.564481 4.46131 4.826402 4.295819 4.128495 4.14712 3.970841 3.954888 3.896465 4.041834 4.055048 3.990905 4.014085 4.18774 3.823334
4.800985 4.790318 4.27179 3.878593 3.777761 3.600915 3.500566 3.332545 3.264156 3.104979 3.049671 2.972833 2.918616 2.806173 2.72122 2.636969 2.587574 2.571033 2.531183 2.528862 2.49279 2.488256 2.480298 2.479022 2.471416 2.426391
1.944907 2.034541 1.830583 1.68848 1.462896 1.606533 1.558204 1.495438 1.47441 1.181772 1.27853 1.381184 1.375923 0.785943 1.146621 1.145444 1.028028 1.171225 1.107478 1.16126 0.943746 0.921465 0.969692 0.94396 0.755092 1.029447
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2.506194 2.366134 2.276861 2.222136 2.309996 2.104468 2.21547 2.252484 2.085943 2.082119 2.06249 1.950185 1.887168 1.817383 1.894873 1.853643 1.806343 1.817348 1.712828 1.805952 1.688983 1.67777 1.66763 1.583032 1.573663 1.600695 1.426953 1.345791 0.665337 0.470852 0.434825 47.88077 45.20492 43.49937 42.45386 44.13241 40.2058 42.32649 43.03366 39.85189 39.77883 39.40382 37.25824 36.0543 34.72105 36.20151 35.4138 34.51013 34.72038 32.72353 34.50267 32.26797 32.05375 31.86003 30.24378 30.06479 30.58123 27.2619 25.71129 12.71125 8.995614 8.307326 3.990064 3.767077 3.624948 3.537821 3.677701 3.350483 3.527207 3.586138 3.320991 3.314902 3.283651 3.104853 3.004525 2.893421 3.016792 2.95115 2.875844 2.893365 2.726961 2.875222 2.688997 2.671146 2.655002 2.520315 2.505399 2.548436 2.271825 2.142608 1.059271 0.749635 0.692277 2.418211 2.34261 2.326927 2.326573 2.320136 2.214067 2.193087 2.139093 2.119348 2.058902 1.972293 1.924824 1.9234 1.920291 1.893613 1.886398 1.844137 1.821141 1.763771 1.756849 1.737399 1.678095 1.617124 1.581586 1.563064 1.510703 1.434919 1.399729 0.624229 0.443514 0.389688 0.846357 0.918143 1.028906 1.115324 0.962572 1.077651 0.858967 0.692048 0.917704 0.802901 0.660934 0.744796 0.842275 0.947161 0.770433 0.821646 0.812431 0.748917 0.800582 0.638475 0.785801 0.685045 0.579246 0.642856 0.62073 0.472971 0.598013 0.656849 0.189188 0.137393 0.087099
Securities identification for the month of February UNDERLYING UNDERLYING DAILY DATE SYMBOL ANNUALISED VOLATILITY VOLATILITY 0.318904 6.092646 0.507721 0.188817
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28-Feb-05 NSETB91D

28-Feb-05 NSE10Y06 28-Feb-05 NSE10YZC 28-Feb-05 NIFTY 28-Feb-05 ONGC 28-Feb-05 GRASIM 28-Feb-05 CNXIT 28-Feb05 TCS 28-Feb-05 HINDALC0 28-Feb-05 RELIANCE 28-Feb-05 DRREDDY 28-Feb-05 TATAMOTORS 28-Feb-05 IOC 28-Feb-05 RANBAXY 28-Feb-05 TISCO 28-Feb-05 NATIONALUM 28-Feb-05 INFOSYSTCH 28-Feb-05 NTPC 28-Feb-05 ITC 28-Feb-05 ICICIBANK 28-Feb-05 HDFC 28-Feb-05 HCLTECH 28-Feb-05 ACC 28-Feb-05 M&M 28-Feb-05 BAJAJAUTO 28-Feb-05 BEL 28-Feb-05 CIPLA 28-Feb-05 BHEL 28-Feb-05 TATATEA 28-Feb-05 WIPRO 28-Feb-05 IPCL 28-Feb-05 MTNL 28-Feb-05 SATYAMCOMP 28-Feb-05 HINDPETRO 28-Feb-05 GUJAMBCEM 28-Feb-05 I-FLEX 28-Feb-05 ORIENTBANK 28-Feb-05 REL 28-Feb-05 BPCL 28-Feb-05 HDFCBANK 0.368082 0.559194 1.02725 1.179421 1.196704 1.307356 1.318359 1.32757 1.375077 1.448611 1.534429 1.539658 1.542023 1.548294 1.556019 1.59107 1.59162 1.60338 1.61902 1.619342 1.628412 1.636131 1.661675 1.670042 1.675728 1.708552 1.741348 1.773471 1.77514 1.775798 1.814013 1.819592 1.836468 1.845992 1.869849 1.874766 1.875299 1.933961 1.942202 7.032202 10.68339 19.62559 22.53281 22.86299 24.977 25.18721 25.36319 26.27082 27.67567 29.31522 29.41512 29.46031 29.58012 29.7277 30.39734 30.40785 30.63253 30.93133 30.93749 31.11076 31.25823 31.74626 31.90612 32.01473 32.64184 33.2684 33.88213 33.914 33.92657 34.65667 34.76326 35.08568 35.26763 35.72342 35.81735 35.82754 36.94827 37.10571 0.586017 0.890283 1.635466 1.877734 1.905249 2.081417 0.217935 0.331089 0.608216 0.698313 0.708545 0.774061
2.098934 0.780575 2.113599 0.786029 2.189235 0.814158 2.306306 0.857695 2.442935 0.908506 2.45126 0.911602 2.455026 0.913003 2.46501 0.916716 2.477309 0.92129 2.533112 0.942042 2.533987 0.942367 2.55271 0.94933 2.577611 0.958591 2.578124 0.958782 2.592563 0.964151 2.604853 0.968722 2.645522 0.983847 2.658843 0.988801 2.667894 0.992166 2.720153 1.011601 2.772367 1.031019 2.82351 1.050039 2.826166 1.051026 2.827214 1.051416 2.888056 1.074043 2.896938 1.077346 2.923806 1.087338 2.938969 1.092977 2.976951 1.107102 2.984779 1.110013 2.985628 1.110329 3.079023 1.145062 3.092143 1.149941
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28-Feb-05 POLARIS 28-Feb-05 SCI 28-Feb-05 SBIN 28-Feb-05 MARUTI 28-Feb-05 TATAPOWER 28-Feb-05 HINDLEVER 28-Feb-05 GAIL 28-Feb-05 MASTEK 28-Feb-05 HEROHONDA 28-Feb1.951512 2.02046 2.078229 2.086856 2.086968 2.095563 2.134789 2.143458 2.323041 37.28359 38.60084 39.70452 39.86933 39.87147 40.03567 40.78509 40.9507 44.38164 45.01793 49.73306 52.83031 55.00301 60.41012 64.13253 64.64491 65.17391 3.106965 3.216737 3.30871 3.322444 3.322622 3.336306 3.398757 3.412559 3.69847 1.155453 1.196277 1.230481 1.235588 1.235654 1.240743 1.263968 1.269101 1.375429
05 PNB 2.356346 28-Feb-05 BANKBARODA 2.603147 28-Feb-05 CANBK 2.765265 28-Feb-05 ARVINDMILL 2.878989 28-Feb-05 ANDHRABANK 3.16201 28-Feb-05 SYNDIBANK 3.35685 28-Feb05 BANKINDIA 3.383669 28-Feb-05 UNIONBANK 3.411358
3.751494 1.395148 4.144422 1.541275 4.402526 1.637261 4.583584 1.704595 5.034176 1.872166 5.344378 1.987528 5.387076 2.003407 5.431159 2.019801
On these particular days BANK OF INDIA and PUNJAB NATIONAL BANK are the highly volatile securities because it is characterized with high price fluctuations and a good trading volume and TCS is the low volatile security with low price fluctuation and a considerable trading volume. for the above reasons I have selected these securities.
Comparison of securities with the market

Behavior of volatile securities when the market is volatile
SYMBOL
OPEN
HIGH
LOW
CLOSE
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PNB S&P CNX NIFTY BANKINDIA S&P CNX NIFTY 442 2061.2 84 2061.2 463.35 2106.2 89.9 2106.2 437 2047.7 83.8 2047.7 457.5 2103.25 88.85 2103.25
PNB VS S&P CNXNIFTY 50
470 465 460 455 450 445 440 435 430 425 420 OPEN HIGH LOW CLOSE
2120 2100 2080 2060 2040 2020 2000 PNB NIFTY 50
BANK OF INDIA VS S&P CNXNIFTY 50
91 90 89 88 87 86 85 84 83 82 81 80 OPEN HIGH LOW CLOSE
2120 2110 2100 2090 2080 2070 2060 2050 2040 2030 2020 2010
BANKINDIA NIFTY 50
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Behavior of nonvolatile securities when the market is volatile
SYMBOL OPEN TCS 1379 S&P CNX NIFTY 50 2061.2
HIGH 1385 2106.2
LOW 1340 2047.7
CLOSE 1380.9 2103.25
TCS VS S&P CNXNIFTY 50

1390 1380 1370 1360 1350 1340 1330 1320 1310 OPEN HIGH LOW CLOSE 2120 2100 2080 2060 2040 2020 2000 TCS NIFTY 50
Derivative strategies
After classifying the securities, we need to identify the suitable derivative strategies for volatile market movements. In general, the following derivative strategies are prevalent in the market Bull spread with call option Bull spread with put option Bear spread with call option Bear spread with put option
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Bull call spread Bear put spread Strangle Straddle Box spread Butterfly spread with calls Butterfly spread with calls
The pay-off for the above strategies are calculated and we will be identifying the suitable derivative strategy(s) for volatile market. The same exercise would be followed for all three classification viz., volatile, low volatile and normal securities.
12.1 Straddle A straddle consists of a call and a put option with the same exercise price and the same expiration. The buyer of a straddle buys the call and put, while the seller of a straddle sells the same two options. 12.2 Strangle Like a straddle, strangle consists of a put and a call option with the same expiration date but with different exercise price. In a strangle, the call option has an exercise price above the stock price and the put option has an exercise price below the stock price. 12.3 Bull spread with call option
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A bull spread in the options market is a combination of options designed to profit if the price of the underlying good rises. A bull spread utilizing call options requires two calls with the same underlying stock and the same expiration date, but with the different exercise prices. The buyer of a bull spread buys a call with an exercise price below the stock price and sells a call option with an exercise price above the stock price. This spread is a bull spread because the trader hopes to profit from a price rise in the stock. The trade is a spread because it involves buying one option and selling a related option. 12.4 Bear spread with call option A bear spread in the options market is a combination of options designed to profit from falling stock prices. A bear spread utilizing call options requires two calls with the same underlying stock and the same expiration date. The two calls however have different exercise prices. To execute a bear spread with calls, a trader would sell the call with the lower exercise price and buy the call with higher exercise price. In other words, the bear spread with calls is just the short position to the bull spread with calls.
12.5 Bull spread with put option A bull spread utilizing put options requires two calls with the same underlying stock and the same expiration date, but with the different exercise prices. The bull spread consists of buying a put option with a lower exercise price and selling the put option with higher exercise price.
12.6 Bear spread with put option A bear spread utilizing put options requires two calls with the same underlying stock and the same expiration date, but with the different exercise prices. The bear spread consists of buying a put option with a higher exercise price and selling the put option with lower exercise price.
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12.7 Box spread A box spread consist of a bull spread with calls plus a bear spread with puts, with the two spreads having the same pairs of exercise prices.
12.8 Butterfly spread with call option A butterfly spread can be executed by using three calls with the same expiration date on the same underlying stock. The long trader buys one call with a low exercise price, buys one call with high exercise price, and sells two calls with intermediate exercise price. The short trader sells one call with a low exercise price, sells one call with high exercise price, and buying two calls with intermediate exercise price.
12.9 Butterfly spread with put option A butterfly spread can be executed by using three calls with the same expiration date on the same underlying stock. The long trader buys a put with a low exercise price, buys one put with high exercise price, and sells two calls with intermediate exercise price. The short trader sells a put with a low exercise price, sells a put with high exercise price, and buys two puts with intermediate exercise price.
Calculation of pay offs
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Payoffs for volatile security Straddle SCRIPT NAME PNB
STRIKE COST PRICE SELLLING PRICE SP-CP LOTSIZE TOTAL
DATE 28-Feb05 28-Feb05
OPTION
PRICE
CA PA
420 420
23.5 20.25
37 12.3
13.5 -7.95
1200 1200
16200 -9540 6660
Strangle SCRIPT NAME PNB

OPTION
PRICE
CA PA
420 400
23.5 10.9
37 5.5
13.5 -5.4
1200 1200
16200 -6480 9720
Bull call spread SCRIPT NAME PNB

STRIKE SELLLING COST PRICE PRICE SP-CP LOTSIZE TOTAL
DATE 28-Feb05 28-Feb-
OPTION
PRICE
CA CA
420 440
23.5 10
37 19.25
13.5 9.25
1200 1200
16200 11100
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05 27300
Bear put spread SCRIPT NAME PNB

OPTION
PRICE
PA PA
420 400
20.25 10.9
12.3 5.5
-7.95 -5.4
1200 1200
-9540 -6480 -16020
Bull spread with call option SCRIPT NAME PNB

STRIKE DATE OPTION PRICE COST PRICE SELLLING PRICE SP-CP LOTSIZE TOTAL
28-Feb05 28-Feb05 CA CA 420 460 23.5 6.1 37 8.85 13.5 2.75 1200 1200 16200 3300 19500
Bear spread with put option SCRIPT NAME PNB Babasabbpatilfreepptmba.com

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OPTION
PRICE
PA PA
400 450
10.9 25.25
5.5 26.5
-5.4 1.25
1200 1200
-6480 1500 -4980
Box spread SCRIPT NAME PNB

28-Feb05 28-Feb05 28-Feb05 28-Feb05 CA CA PA PA 420 460 400 450 23.5 6.1 10.9 25.25 37 8.85 5.5 26.5 13.5 2.75 -5.4 1.25 1200 1200 1200 1200 16200 3300 -6480 1500 14520
Butterfly spread with call option
SCRIPT NAME PNB

DATE 28-Feb05 28-Feb05 28-Feb-
OPTION
PRICE
CA CA CA
430 410 420
13.5 31.8 23.5
28 31.8 21.1
14.5 0 -2.4
1200 1200 2400
17400 0 -5760
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05 11640
Butterfly spread with put option
SCRIPT NAME PNB

DATE 28-Feb05 28-Feb05 28-Feb05
OPTION
PRICE
PA PA PA
440 420 400
23.3 20.25 10.9
21 12.3 5.5
-2.3 -7.95 -5.4
1200 1200 2400
-2760 -9540 -12960 -25260
Pay off for low volatile security
Straddle SCRIPT NAME TCS

DATE 28-Feb05 28-Feb-
OPTION
PRICE
CA PA
1350 1350
53.5 44
62.75 23.6
9.25 -20.4
250 250
2312.5 -5100
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05 -2788
Strangle SCRIPT NAME TCS

OPTION
PRICE
CA PA
1350 1290
53.5 16
62.75 15
9.25 -1
250 250
2312.5 -250 2062.5
Bull call spread SCRIPT NAME TCS

OPTION
PRICE
CA CA
1350 1440
53.5 14
62.75 15.8
9.25 1.8
250 250
2312.5 450 2762.5
Bear put spread SCRIPT NAME TCS Babasabbpatilfreepptmba.com

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OPTION
PRICE
PA PA
1290 1350
16 44
15 23.6
-1 -20.4
250 250
-250 -5100 -5350
Bull spread with call option
SCRIPT NAME TCS

28-Feb05 28-Feb05 CA CA 1350 1410 53.5 26 62.75 27.45 9.25 1.45 250 250 2312.5 362.5 2675
Bear spread with put option TCS

STRIKE COST PRICE SELLLING PRICE SP-CP LOTSIZE TOTAL OPTION PRICE
SCRIPT NAME
DATE 28-Feb05
PA
1350
44
23.6
-20.4
250
-5100
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28-Feb05 PA 1380 35 35 0 250 0 -5100
Box spread SCRIPT NAME TCS

28-Feb05 28-Feb05 28-Feb05 28-Feb05 CA CA PA PA 1350 1410 1350 1380 53.5 26 44 35 62.75 27.45 23.6 35 9.25 1.45 -20.4 0 250 250 250 250 2312.5 362.5 -5100 0 -2425
Butterfly spread with call option SCRIPT NAME TCS

DATE 28-Feb-05 28-Feb-05 28-Feb-05
OPTION
PRICE
CA CA CA
1470 1410 1440
15.95 26 14
15.95 27.45 15.8
0 1.45 1.8
250 250 500
0 362.5 900 1262.5
Butterfly spread with put option SCRIPT NAME TCS DATE OPTION
STRIKE
COST
SELLLING
SP-CP
LOTSIZE
TOTAL
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PRICE PRICE PRICE
28-Feb05 28-Feb05 28-Feb05 PA PA PA 1470 1410 1440 15.95 26 14 15.95 27.45 15.8 0 1.45 1.8 250 250 500 0 362.5 900 1262.5
Conclusion and Recommendations
The main aim of this project work is to find out the best strategy that gives maximum pay offs to the investor in the volatile market condition. The payoff for both volatile and non volatile securities are calculated and the best strategy for the volatile security in the volatile market condition after taking in to following constraints such as brokerage charges, and a supportive strategy that will not make loss to the investor.
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As per the payoffs calculated for the volatile security in the volatile market condition (i.e. Pnb) the best strategy would be box spread, which has twocall option, and two put option, and it gives the maximum payoff. The best strategy for non-volatile security (i.e. Tcs) in the volatile market condition would be strangle because it has both call and put option so the possibility of incurring loss is comparatively low, and the second best strategy would be bull call spread.
References
www.nseindia.com www.ivolatility.com
www.mof.nic.in www.ndtv.com
www.derivativesindia.com www.sebi.gov.in
Futures, options and swaps by Robert W. Kolb. Babasabbpatilfreepptmba.com

Page 56

Understanding futures market by Robert W. Kolb. Futures and options by Hans R.Stoll and Robert E. Whaley. Rules, regulations and bye laws, (F &O segment) of NSE & NSCCL NSE NCFM material.
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A Project Report On A Study On Derivatives in Volatile Market Condition

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