A STUDY ON

THE ROLE OF FINANCIAL FUTURES

WITH REFERENCE TO NSE NIFTY
 CHAPTER 1
INTRODUCTION

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1.1 INTRODUCTION

Futures play an important role in the field of finance. Many kinds of futures instruments
have been developed and the use of futures has received a great deal of attention. Futures
contract like options are important derivative instruments and a major innovation in the
field of risk management.

FEATURES OF A FUTURES CONTRACT

A futures contract is a standardized forward contract. An agreement between two parties

to exchange an asset for cash for a predetermined future date for a price that is specified
today represents a forward contract. The terms which are used in futures contract are:
Short position: This commits the seller to deliver an item at the contracted price on
maturity.
Long position: This commits the buyer to purchase an item at the contracted price on
maturity.

DIFFERENCES BETWEEN FORWARDS AND FUTURES

A standardized forward contract is a futures contract. The differences are:

• A forward contract is a tailor made contract (the terms are negotiated between
the buyer and the seller),whereas a futures contract is a standardized
contract(quantity, date and delivery conditions are standardized).
• While there is no secondary market for forward contracts, the futures contracts
are traded on organized exchanges.
• Forward contracts usually end with deliveries, whereas futures contracts are
settled with the differences.
• Usually no collateral is required for a forward contract. In a futures contract,
however a margin is required.

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• Forward contracts are settled on the maturity date, whereas futures contract are
‘marked to market’ on a daily basis. This means that profits and losses on
futures contract are settled daily.

KEY FEATURES OF FUTURES CONTRACTS

The key features of future contract are:

• Standardization
• Intermediation by the exchange
• Price limits
• Margin requirements
• Marking to market

Standardisation: Traded futures contracts are standardized in terms of asset

quality, asset quantity, and maturity date. The purpose of standardization is to
promote liquidity and allow parties to the futures contracts to close out their
positions readily.

Intermediation by the Exchange: In a traded futures contract the exchange

interposes itself between the buyer and the seller of the contract. This means
that the exchange becomes the seller to the buyer and the buyer to the seller.

Price limits: Futures exchanges impose limits on price movements of futures

contracts. Price limits are meant to prevent panic buying or selling, triggered by
rumors, and to prevent overreaction to real information.

Marking-to-market: While forward contracts are settled on the maturity date,

futures contracts are ‘marked to market’ on a periodic basis. This means that the
profits and losses on futures contracts are settled on a periodic basis.

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FUTURES CONTRACTS: THE GLOBAL SCENE
Broadly there are two types of futures: commodity futures and financial futures.
A commodity futures is a futures contract in a commodity like cocoa or aluminum, while
financial futures is a futures contract in a financial instrument like Treasury bond,
currency ,or stock index.

COMMODITY FUTURES (STORABLE COMMODITIES)

Futures contracts on various commodities, storable as well as perishable, like gold, oil,
aluminum, cotton, rice, and wheat and orange juice have been in existence for nearly
three centuries.
For a storable commodity buying in the spot and storing it until the expiration of the
futures contract is equivalent to buying a futures contract and taking delivery at the
maturity date.

Futures price= spot price+ present value of storage costs-

Present value of convenience yield.

COMMODITY FUTURES (PERISHABLE COMMODITIES)

For pricing futures contracts on the basis of arbitrage, the asset has to be storable. Hence
perishable commodities have to be analyzed differently.
The futures price of a perishable commodity is influenced by two factors mainly: the
expected spot price of the underlying commodity and the risk premium associated with
the futures position.
Futures price= Expected spot price – Expected risk premium

FINANCIAL FUTURES

A financial future is a futures contract on a short term interest rate (STIR). Contracts
vary, but are often defined on an interest rate index such as 3-month sterling or US dollar
LIBOR.

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In finance, a futures contract is a standardized contract, traded on a futures exchange, to
buy or sell a certain underlying instrument at a certain date in the future, at a specified
price. The future date is called the delivery date or final settlement date. The pre-set price
is called the futures price. The price of the underlying asset on the delivery date is called
the settlement price. The settlement price, normally, converges towards the futures price
on the delivery date.

A futures contract gives the holder the obligation to buy or sell, which differs from an
options contract, which gives the holder the right, but not the obligation. In other words,
the owner of an options contract may exercise the contract. Both parties of a "futures
contract" must fulfill the contract on the settlement date. The seller delivers the
commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the
futures trader who sustained a loss to the one who made a profit. To exit the commitment
prior to the settlement date, the holder of a futures position has to offset his position by
either selling a long position or buying back a short position, effectively closing out the
futures position and its contract obligations.

Futures contracts, or simply futures, are exchange traded derivatives. The exchange's
clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.

SHORT-TERM INTEREST RATE FUTURES

Contract specifications

An assortment of contracts. The Eurodollar contract is the linchpin of the short-

end interest rate futures contracts. Other dollar-denominate short-term interest rate
futures; no comparable contracts exist for other currencies.

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Eurodollar futures
The Eurodollar futures market is the most widely traded money market contract in
the world, although trading in it only started as recently as 1981. It is based on a ninety-
day Eurodollar deposit, which is a dollar-denominate deposit with a bank or branch
outside of the U.S. or with an international banking facility (IBF) located in the U.S.
Eurodollar deposits differ from domestic term deposits or certificates of deposit in the
U.S. in that they are not regulated by U.S. authorities and hence are not subject to reserve
requirements or deposit insurance premiums. The Eurodollar futures rate on any
particular contract-month is essentially the 3-month LIBOR rate that is expected to
prevail at the maturity of the contract.

Basic contract specifications: The nominal contract size is $1 million and the
underlying rate is the three-month LIBOR, the rate at which a London bank is willing to
lend dollars (i.e., the offer side of the cash money market). The futures price is quoted as
100 minus the annualized futures 3-month LIBOR (e.g., a price of 96.5 implies a futures
LIBOR rate of 3.5% per annum) in decimal terms.

Contract settlement: Eurodollar contracts are settled in cash rather than with
physical delivery (which would entail the short opening a time deposit on behalf of the
long). The disadvantages of delivery in this case are of two kinds: (i) Eurodollar deposits
are non-negotiable and hence delivery would bind the long to a three-month investment;
(ii) heterogeneity of bank credits would systematically raise questions on the quality of
the delivered asset.
Trading of Eurodollar contracts: Eurodollar contracts are now traded at the
CME in Chicago, at LIFFE in London and at SIMEX in Singapore. Thus, Eurodollar
contract trading is de-facto available 24 hours.

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Pricing and arbitrage: Implied forward rates
In order to understand how futures prices are established, we need to understand
how prices of futures contracts are related to the spot or cash market prices of the
underlying asset. We will see that the market forces of arbitrage are used to price
virtually all financial futures contracts. All examples drawn below are based on the three-
month Eurodollar contract; applications with contracts based on different currencies,
maturities or underlying asset constitute a straight-forward extension.

INTERMEDIATE- AND LONG-TERM INTEREST RATE FUTURES

Contract specifications

Deliverable securities: Unlike international bank futures contract, bond futures

are settled at expiration with physical delivery. Also unlike the T-bill futures contract,
bond futures contracts generally allow for a range of bonds to be delivered against them.
For example, U.S. Treasury bond futures contracts allow delivery of any U.S. T-bond that
has at least I. years remaining to maturity (or to first call if the bond is callable); there
may be as many as several dozen securities in the deliverable basket, all with different
maturities and coupons.

Delivery cycle: At futures expiration there is uncertainty not only on the actual
bond that will be delivered but also on the specific timing of the delivery. Of course,
bond futures positions can also be unwound prior to delivery by offsetting futures
transactions. Because this is more convenient for most futures users than physical
delivery, few contracts actually go into delivery.

Futures invoice price: When a bond is delivered into the bond futures contract,
the receiver of the bond pays the short an invoice price equal to the futures price times
the conversion factor of the particular bond chosen by the short. Plus any accrued interest
on the bond:

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 Futures invoice price = futures price conversion factor + accrued interest

Other contract terms: Exchanges set other futures contact terms as follows; the
concrete specifications of the U.S. T-bond contract are shown in parentheses for
illustrative purposes. The contract size defines the par amount of the bond that is
deliverable into the contract ($100,000 for U.S. T-bonds). Delivery months on bond
futures contacts are quarterly (March, June, September and December). The exchange
will also set daily trading hours, the last trading date and the last delivery period (one
month).

Other U.S. medium- and long-term interest rate contracts: The U.S. T-bond,
traded at the CBOT since 1977, was the first fut3ureo n long-tern interest rates. Since
then three futures contracts have been established on U.S. Treasury notes: a 10-year, a 5-
year and a 2-year contract. They all have similar characteristics to their forerunner.

International bond futures contracts. Since 1932, bond futures contracts

designed along the lines of the U.S. T-bond contract have spread internationally. For
illustration purposes, the table below lists the main international bond futures contracts,
where they are traded and the description of their deliverable set.

Pricing and arbitrage

Cash-futures relationship: Similar to short-term interest rate contracts, there is

an arbitrage relationship which holds the prices of the T-bond futures contract to the cash
market. Understanding the relationship between a futures contract and the deliverable
basket is crucial to understanding the drive behind the arbitrage. It is the delivery option
of the short that makes valuing bond futures more complex than valuing international
bank (euro) deposit futures.

The basis. The basis is the difference between a bond's price and the futures
invoice price (as defined above). In other words, it is the difference in cost between

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buying the bond in the cash market and buying a futures contract on it and having it
delivered into the contract at expiration. Accordingly, we define the gross or raw basis
as:
Gross basis = dirty cash price - futures invoice price
= clean cash price - (futures price conversion factor)

since dirty (or full) price = clean price + accrued interest. The basis is generally quoted in
32nds rather than in decimal units - this conversion is performed simply by multiplying
the decimal basis by 32.

Basis arbitrate at futures expiration: At futures expiration, the gross basis

must be equal to zero. Otherwise there would be instantaneous risk less profit
opportunities. Suppose, for instance, that the gross basis was negative (positive). Then
one could: (i) buy (sell) the cheapest to- deliver bond in the cash market; (ii) sell (buy) a
bond futures contract; and (iii) immediately deliver (receive delivery of) the cash bond
against the short (long) futures position.

Risk management and hedging

Basic risk management functions: Bond futures are often used as a vehicle for
hedging price risk or duration. An excessive exposure to intermediate- and long-term
interest rates can be offset by buying or selling bond futures contracts.

Hedge ratio: The construction of the hedge ratio for bond futures follows the same logic
as that for international bank futures contracts developed in Chapter 2. Recall that he
basic formula is:

Hedge ratio = scale factor x basis point value factor x volatility factor

The scale factor is the ratio of the notional or principal amount of the asset being hedged
and the futures contract size. The basis point value factor is the ratio of the change in the

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dollar value of the hedged asset to the change in the dollar value of the futures contract
for a one basis point change in the interest rate. The volatility factor can be set to one if
bond futures are used to hedge interest rate risk of roughly the same credit characteristics
and in roughly the same yield curve segment.

Expressing a market view

Types of trades: The third application of bond futures, trading on the basis of
market views, requires by definition that not all risk be hedged. Bond futures, as was the
case with international bank deposit futures, can be traded:

* outright, to express a view on market direction;

* in combination with other bond futures contracts, using spreads or butterflies that
combine
longs and shorts at different points in time or across countries; or

* in combination with the underlying (typically the cheapest-to-deliver bond) in what

amounts to basis trades.

Outright trading: Bond futures by themselves don't have duration. But because
they track the cheapest-to-deliver bond (driven by basis traders), they contribute dollar
duration to portfolios much along the lines of the cash bond. Going long the futures is a
way of extending duration: it pays when the market is rallying and rates are falling.
Shorting bond futures, on the contrary, reduces market sensitivity to rate movements and
performs well in a bear market. Playing duration with futures fulfills the same objective
as playing the bond market directly, but with the convenience of the futures market in
terms of narrow bid/ask spreads, easy reversibility of positions and low cash
requirements.

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 Spread trading: As a word of caution, it should be mentioned that bond future
spread or butterfly trades are less straight forward in their interpretation than similar
trades with international bank deposit futures. For instance, Interpreting a bond future
calendar spread as a reading on a particular segment of the yield curve is made difficult
by each contracts' particular sensitivity to shifts in the cheapest-to-deliver and to changes
in the repo rate on the cheapest deliver. In a similar vein, cross-country spreads may be
driven by differences of the duration of their respective cheapest-to-deliver bonds than by
the absolute level of long-term rates.

Basis trading: Trading the basis from the long side is relatively risk less if the
position is held to the futures expiration date, as explained above. A basis trade can -.1so
be held for shorter time horizon but then the position is subject to risk at the unwind. A
short-term basis position financed at an overnight rather than term rate constitutes a bet
on basically two things: (i) the level of long-term rates (which determines which bond
will be the cheapest-to-deliver since they each have different sensitivity to market rates
according to their duration); and (ii) the evolution of short-term rates, and in particular
whether the cheapest-to-deliver goes on special in the repo market Short-term basis
trading is in fact quite complex, and can be used to take on risk subject to one's views in
addition to as an arbitrage play. Basis trades can be entered into directly (by playing the
bond and futures markets simultaneously as discussed in Section B) or indirectly by
replacing an existing long bond position with a long position in bond futures and short-
term money market investments.

CURRENCY FUTURES

Contract specifications

Types of contracts. Foreign currency futures contracts are available on all major
currencies against the dollar (e.g., GBP, CAD, DEM, JPY, SRF, AUD, etc.), most of
which are traded at the CME and at LIFFE. In addition, there are futures on a USD index
(i.e., average of bilateral rates against the dollar) at the CBOT. Finally, there are futures

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on crosses, i.e., bilateral exchange rates between two non-dollar currencies such as on
JPY/DEM.

Contract specifications. Currency futures against the dollar, by far the most
prevalent, tend to have quarterly contracts with delivery in March, June, September and
December. They tend to require actual delivery, meaning that at futures settlement the
long receives the currency of denomination of the future and pays dollars). Price quotes
are on American terms, i.e., based on number of dollars per unit of foreign currency.

Pricing and arbitrage: International interest rate parity

Overview. As with interest rate futures, the prices of currency futures are bound
by a basic arbitrage relationship with the underlying cash market. Arbitrage relations are
cleaner with forwards than with futures because mark-to-market payments on futures
introduce an element of reinvestment risk that cannot be fully hedged. However, in the
case of currencies, the difference between forward and futures prices is less important
than with interest rates. There is no financing bias against the long as was the case with
interest rate futures if exchange rates are assumed to be uncorrelated with the level of
interest rates.

Expressing a market view

Outright trading. Futures are a natural instrument to express views on future

exchange rate movements. For instance, going long the JPY contract (i.e., long yen and
short dollars) is consistent with an expectation of an appreciation of the yen relative to
the dollar. Conversely, shorting the contract is consistent with an expectation of a yen
depreciation relative to the dollar. More formally, one should buy the JPY contract if one
expects the yen to appreciate more than what is already expected (or priced in) by the
market. Conversely, the contract should be sold if one expects the yen to appreciate more
than what is expected by the market.

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STOCK INDEX FUTURES

Contract specifications

The underlying instrument. Stock market indexes are time series designed to
track the changes in the value of hypothetical portfolios of stocks. Stock indexes differ
from one to another with respect to the range of stocks covered, stock weighting, and
index computation. Indexes differ in composition because of the need to measure the
price movements of the equity markets of different countries and different segments of
each of these national equity markets.
Though returns on stock indexes of the same country are often highly correlated over
time, relative performance can vary sharply over periods such as a month or a quarter.

Index construction: The weight of a stock in an index is the proportion of the

portfolio tracked by the index invested in the stock. The stocks in the portfolio can have
equal weights or weights that change in some way over time. The most common
weighting scheme is market value weighting, used for example in both the S&P 500 and
NYSE indexes.

Treatment of dividends: Stock indexes are not usually adjusted for cash
dividends. In other words, any cash dividends received on the portfolio are ignoring when
percentage changes in most indexes are being calculated. This implies that percentage
changes in stock indexes do not track total returns on the corresponding portfolio of
stocks but, only price changes.

Futures contract specifications: All futures contracts on stock indexes are

settled in cash. Physical delivery of stocks against a futures contract based on an index
presents intractable difficulties. First, not every index correspond to a well defined
portfolio of stocks (for example, those indexes constructed using geometric means).
Moreover, it is not feasible to construct a broad market value weighted portfolio that is
both of manageable size to be delivered and contains whole numbers of shares for all

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companies. To solve these problems stock index futures contracts are settle in cash and
the underlying assets are defined to be an amount of cash equal to a fixed multiple of the
value of the index.

Contracts traded. For illustration purposes, following is a list of the main international
stock indexes and futures contracts on these indexes:

* S&P 500 (CME). Based on a portfolio of 500 American stocks. The index accounts for
80% of the NYSE. The value of one futures contract is $500 times the index.

* S&P 400 (CME). Based on a portfolio of 400 American stocks. The value of one
futures contract is $500 tirmes the index.

* NYSE composite futures (NYSE). Based on a portfolio of all the stocks listed on the
NYSE. The value of one futures contract is $500 times the index.

* Major market index (CME). Based on a portfolio of 20 blue-chip American stocks

listed on the NYSE. The value of one futures contract is $500 times the index.
* Value Line futures (KC). Contains the prices of 1,700 American stocks. It does not
correspond directly to any portfolio of stocks because of its use of geometric averaging.
The value of one futures contract is $500 times the index.

* Nikkei 225 stock average (CME). Based on a portfolio of 225 of the largest stocks
listed on the Tokyo Stock Exchange. The value of one fuLturesc ontact is $5 times the
index.

*CAC-4s0t ock index (MATIF). Based on a portfolio of 40 of the largest stocks listed on
the Paris Stock Exchange. The value of one futures contract is FRF200 times the index.

* FT-SE 100 index (LUFFE). Based on a portfolio of 40 of the largest stocks listed on the
London Stock Exchange. The value of one futures contract is GBP 25 times the index.

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Pricing and arbitrage

Like futures on fixed income instruments and currencies, stock index futures
prices should be related to the underlying cash market by a cost of carry relationship or,
in other words, by the cash-forward relationship. Otherwise arbitrage trades are possible.
As with interest rate and currency futures stock index futures prices and forward prices
may differ because mark-to-market payments on -futures introduce an element of
reinvestment risk that cannot be fully hedged.

Risk management and hedging

Overview. Stock index futures provide a means of adjusting, acquiring, or

eliminating exposure to the fluctuations of overall stock market Stock index futures
strategies may be preferable to other means of adjusting and managing equity exposure
because of cheaper transaction costs, attractive prices available on the futures contract,
ease of adjusting positions (liquidity), or the difficulty of moving funds quickly and on a
large scale into and out of particular stocks.

Hedging stock portfolios: The objective of hedging with stock index futures is
to reduce or eliminate the sensitivity of an equity portfolio to changes in the value of the
underlying index. The sale of stock futures against a stock portfolio creates a hedged
position with returns very similar to those of a short-term, fixed-income security. An
interesting example of users of stock futures as hedging vehicles are brokers and dealers
in equities.

Creating synthetic index fund portfolios: Futures can be used to create

portfolios that have cash flows characteristics similar to an index fund portfolio.
Managing index fund portfolios involves considerable oversight in terms of maintaining
the correct weights as prices change and reinvesting any dividends that are received.
Index futures can provide a means of cheaper access to such a portfolio.

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 Capitalizing on different tax treatment of futures and equities. Stock index
futures can be used to create portfolios that have cash flows characteristics similar to an
index fund portfolio, the different tax treatments of those returns may make it
advantageous for some investors to use equity futures. All profits and losses on stock
index futures are effectively treated as long-term capital gains and losses.

Expressing a market view

Outright trading: Futures are a natural instruments to express views on future

exchange rate movements. Since a deposit of less than 10 percent is required to purchase
or sell a stock futures contract, one can take on a considerable amount of market risk via
index futures and reap the reward of being correct in a forecast of the stock market
direction.

Spreads: A wide range of speculative strategies are possible by mixing stock

index futures contracts of different maturities and or different underlying indexes.

Capitalizing on stock selectivity. The strategy that should be employed is to

sell stock futures up to reduce or eliminate the market-related component of that
portfolio's risk and returns, and leave the returns and risk component associated with the
company-specific features of the stocks in the portfolio.

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OPTIONS ON FUTURES

Definition and Pricing

Definition and types of options. The key to options is to understand that

holding an option represents a right rather than an obligation. There are two types of
options on futures:

* A call option confers upon its holder the right to establish a long (buying) futures
position.

* A put option confers upon its holder the right to establish a short (selling) futures
position.

In either case, the futures position may be established by the option holder on any date up
to a pre-determined expiration date at a pre-determined price (the strike price). The
purchaser of the option pays a market-determined price (or premium) in order to have the
right --but not the obligation-- to establish the corresponding futures position by
exercising the option at some time in the future. Conversely, the writer (or seller) of the
option receives the premium when the option is issued and must stand ready to accept the
corresponding futures position at any time duning the life of the option.

"Moneyness" of options. The intrinsic value or moneyness of an option is the

higher of its value if it were to be exercised immediately and zero (its value if it is not
worth exercising), whichever is greater. For example, for a call, if the market price of the
underlying is above the option's strike price, the option has exercise value and is said to
be in the money. If the market price of the
underlying is below the call option's strike price, the option has no exercise value and is
said to be out of the money. The same applies, but in reverse, to put options

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Futures positions at option exercise: To summarize, the options on futures, if exercised,
yield the following futures positions:

bought call if exercised long futures

bought put by the party short futures
sold call long the short futures
sold put option, yields long futures

Underlying instruments. There are options on all the types (though not
necessarily on all the specific contracts) of financial futures. Among the most liquid
option contracts (and the corresponding exchanges where they are traded) are:

*Short-term interest rates: Eurodollars (at the CME)

*Longer-term interest rates: US Treasury bonds and notes (at the CBOT)

*Currencies: Deutschemarks and Yen (at the CME)

*Stock-indexes: S&P500 (at the CME)

Pricing models: A commonly used pricing model for options on futures is the
Black model, which is an extension of the Black-Shoes model originally derived for
pricing equity options.

Use of options on futures versus use of futures. Hedgers and investors might
want to use options on futures rather than futures themselves for the following reaso,:

*Creating asymmetric payoffs on the upside and downside. There is no downside risk
to buying an option. If the price goes against you, you let the option expire worthless and
pay no more. With a futures position, you must pay the daily settlement variation when
the price goes against you. The price you pay for having the security offered by an option

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is the upfront premium. Conversely, if you are willing to accept the risk of an unlimited
downside exposure, you might consider selling an option and collect the premium
upfront. Thus, whether futures or options on futures are utilized by traders and corporate
treasurers depends on their preferences on the risk/reward structure.

* Hedging or trading on the basis of market volatility. Futures are not directly affected
by changes in market volatility. Some users, however, might want to hedge market
volatility, or actually express views on the basis of market volatility. Only options allow
them to isolate the volatility component on the basis of which they can hedge or trade

*Contingent contracts. Options might be suitable if the asset, liability or cash flow
being hedged is of a contingent nature. For example, suppose you are negotiating with a
Japanese company for electrical parts. The Japanese company will decide at the next
board meeting, which takes place in a month, whether to provide parts at the agreed upon
prices. The U.S. corporation will lose its profit margin if the yen appreciates relative to
the dollar at the time the Japanese firm agrees to the contract. In this case, it may pay for
the U.S. firm to hedge the contingent payable by buying options on yen futures..

Hedging example: floating-rate note issuance. Options on futures can be used

instead to insure against adverse interest rate moves. For a fixed price (the option
premium), and interest rate cap (i.e. long a put on Eurodollars) allows the borrower to
take advantage of favorable rate moves while limiting the damage done by a rises in
rates.
Trading volumes. The volume traded on options on futures is much larger than
on equivalent options on the cash instruments. This is due to the fact that futures are
leveraged instruments. This makes options on futures easier to hedge dynamically since
one does not need to worry about financing of positions in the underlying.

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Liquidity and market depth

In derivatives markets, unlike in cash markets, most of the action happens in the
future. Because they bind buyer and seller for a pre-specified period of time, users will
only feel comfortable using derivatives markets if they are liquid and deep enough to
allow investors to rebalance their portfolios in response to new information at low cost.

Market liquidity: A market is liquid when traders can buy and sell without
substantially moving the price against them. Liquidity typically arises when there are
individuals or institutions which continuously wish to buy or sell. Liquidity is provided to
a large degree by locals (individuals trading on their own capital) trading in the pit, or
else by major financial institutions trading in automated systems.

IMPORTANCE OF FUTURES MARKETS

Summary. Over the last decades, futures have become widely accepted by
money managers, financial institutions and corporations and have been successfully
integrated into risk Management and yield enhancement strategies. We have investigated
some of the features of futures contracts, explained some of the basics regarding how
they are priced, and given a few applications illustrating how these contracts would be
used by risk managers and investors.

Economic importance of futures. Futures, and derivatives generally, allow

economic agents to fine tune the structure of their assets and liabilities to better suit their
risk preferences and market expectations. They are not per se a financing or investment
vehicle but rather a tool for transferring price risks associated with fluctuations in asset
values. Some may use them to spread risk, others to take on risk on the basis of particular
market views.

Futures as a building-block: Futures have been a key instrument in facilitating

the modem trend of separating conventional financial products into their basic

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components. In so doing, they allow not only the reduction or transformation of risk
faced by individual investors but also the sheer understanding and measurement of risk.
Financial futures (along with options)
are best viewed as building blocks. Financial management is quickly becoming an
exercise in reducing financials structures into their basic elements and then reassembling
them into a preferable structure. In the process, derivatives have contributed decisively to
the integration of financial markets.

The surge in financial futures. Without resorting to tedious quantification the

astounding growth and importance of derivatives can be illustrated by the fact that the
value of exchange-treaded Eurodollar derivatives( futures and options)i s now roughly 13
times the value of the underlying market. Also, the volume of financial futures now
dwarfs the volume in traditional agricultural contracts.

Futures' features. While the following are noteworthy advantages that futures
have over forwards, it should be noted that our goal is to illustrate how futures can be
used effectively as an investment alternative and as a risk transfer mechanism.

* Futures are relatively inexpensive to execute (negotiable commission rates).

* Futures are bought or sold on margin, and as such provide for substantial
leverage.
* Prices are determined by a competitive market system (open outcry or electronic
bidding).

*All prices and information are available continuously. Participants know all
transaction prices and there are no negotiated deals and no multiple phone calls to get
price quotes.

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 *Positions are easy to reverse if the opinion about market conditions and prospects
changes. Offsets of longs and shorts prevent a bloating of the balance sheet and tying up
of credit lines that can become a problem with over-the-counter derivatives.

*Audit systems and safeguards enforced by regulatory authorities, exchanges and

futures commission merchants provide a level of integrity for the marketplace.

*Counterparty credit risk of non-performance is negligible.

On the other hand, OTC trading allows more flexibility in establishing contract terms and
avoids the need for daily monitoring of mark-to-market positions and margin account.

EQUITY FUTURES IN INDIA

Equity futures are of two types: stock index futures and futures on individual securities.
Both the type of equity futures are available in India.

Stock Index Futures

The National Stock Exchange and the Bombay Stock Exchange have introduced stock
index futures. The National Stock Exchange has a stock index futures contract based on
S&P CNX Nifty Index; The Bombay Stock Exchange has a stock index futures contract
based on Sensex.

Futures on Individual Securities

Futures on individual securities were introduced in India in 2001. The list of securities in
which futures contracts are permitted is specified by Securities Exchange Board of India.
The National Stock Exchange and the Bombay Stock Exchange have introduced futures
on individual securities.

23
1.2 SUBJECT BACK GROUND FOR THE STUDY

Futures market plays an important role in the world of finance. Many kinds of futures
instruments have been developed and the use of futures has received a great deal of
attention.
“A financial futures in a futures contract in a financial instrument like treasury bond,
currency or stock index.”
Eg: Financial futures, US Treasury Bills, Eurodollar deposits, S&P index etc…
Generally futures allow economic agents to fine-tune the structure of their assets and
liabilities to suit their risk preferences and market expectations. Futures are not only a
financing or investment vehicle, but it is a tool for transferring price risks associated with
fluctuations in asset values.
During the last decades the financial products into their basic components. The volume of
trading in financial futures dwarfs the volume in traditional agricultural contracts.

24
1.3 NEED FOR THE STUDY
The needs for the study of financial futures are:
1. Financial futures have become the corner stone of financial management.
2. Futures have become widely accepted by money managers, financial institutions
and corporations have been successfully integrated into risk management and
yield enhancement strategies.
3. Futures have been a key instrument in facilitating the modern trend of separating
conventional financial products into their basic components.
4. Futures are relatively in expensive to execute.
5. Futures have facilitated the modern trend of separating conventional financial
products into their basic components.
6. Financial futures play a prominent role in risk management.

25
 CHAPTER 2

RESEARCH DESIGN

26
2.1 INTRODUCTION

Research Design is the basic frame work which provides the guidelines for research. The
research design specifies the method for data collection analysis. There are mainly two
methods of collecting data, primary and secondary data collection.

2.2 STATEMENT OF THE PROBLEM

Trading on options give lot of volatility to futures market. Futures markets becomes at
times unpredictable compare to SENSEX/NIFTY movements. The researcher feels an in-
depth study in this area, the price movements of futures with respect to SENSEX or nifty
is imperative.

2.3 REVIEW OF LITERATURE

Basic futures contract design

Definition. A futures contract is a commitment to buy or sell a fixed amount of
standardized commodity or financial instrument at a specified time in the future at a
specified price established on the day the contract is initiated and according to the rules
of the regulated exchange where the transaction occurred. Once the trade clears, the
buyer and corresponding seller of the futures contract are not exposed to each other's
credit ri3k. Rather, they individually look to the clearinghouse for performance, and vice
versa.

Futures as a derivative security. A futures contract is a financial derivative of the

commodity on which it is based in the sense that it is an arrangement for exchanging
money on the basis of the change in the price or yield of some underlying commodity.

Timing of cash and commodity flows. Like other derivative securities, futures contract
is an agreement to do something in the futures -- no goods or assets are exchanged today.
A cash market transaction involves an agreement between two counterparties to buy or
sell a commodity for cash today (perhaps for delivery in a couple of days). In a forward

27
market traction, delivery and settlement of the commodity for cash will occur at a single
future date with no intervening cash flows. In afitres market transaction, delivery and
settlement will also occur at a single future date but there will be daily (or more frequent)
cash flows reflecting intervening price movements in the underlying commodity.

Value of futures contracts at the time of contracting. Since there is no exchange of

neither commodities nor cash payments at the time of contracting of futures contracts,
such contracts must have a zero net present value at their inception.
Value of futures contract as spot price changes. Once the futures contract is entered
into, subsequent movements in the (spot) market price of the commodity create value for
either the long futures position (i.e., the buyer) or the short futures position (i.e., the
seller). For instance, a rise in the spot price of the commodity will benefit the long as he
has bought the commodity under the futures contract at a fixed price and can now expect
to sell it in the future at a higher price in the spot market. But since the long will not
realize this gain until the settlement of the futures contract, this creates a credit exposure
to the extent of the net present value of the futures contract. The futures contract will now
be a positive net present value investment for the long and an obligation for the short.

Closing a futures position. A futures position can be closed out before expiration of the
contract by entering into an offsetting trade in the same contract for the samne amount..
Under physical delivery, investors that are long the contract must deliver to investors
short the contract the underlying commodity of the contract according to the rules on
commodity quality and timing established by the exchange.. The determination of the
price of the commodity at expiration on which cash settlement amounts are calculated
(the final settlement price) is made by the exchange under pre-specified rules.

Types of underlving_instruments. Underlying every futures contract is a relatively

active cash market for an asset or good. Futures contracts were traditionally based on
standard physical commodities such as grains (corn, wheat, soybeans), livestock (live
cattle and hogs), energy products (crude oil, heating oil) or metals (aluminum, copper,

28
gold), softs (coffee, sugar, cocoa). In addition, there are futures on several commodity
indices (like the CRB and GSCI). Over the last two decades, futures based on financial
commodities have flourished, such as those based on:

Money market interest rates: certificates of deposit, offshore or euro-deposits

(e.g.,LIBOR-based), and Treasury bills.
Bonds and notes: Treasury securities.
Currencies: yen, deutschemark, pound (against the dollar or crosses)
Equity indices: S&P500, Nikkei 225, NYSE Composite.

B. Forward vs. futures contracts

Futures and forward contracts are similar in the sense that they both establish a price and
a transaction to occur in the future..

Cash flows and margining.

In forward markets cash changes hands only on the forward date In futures markets, gains
and losses are settled daily in the form of margin payments. This serves to reduce credit
exposure to intraday price movements
Tradability. Forward contracts will trade on the basis of price and credit characteristics of
the counterparty. For this reason, forward contracts tend to be traded in over-the-counter
(OTC) markets. The margin requirements on futures contracts make them sufficiently
immune to credit risk so that credit exposure is not a significant factor in pricing. This
makes futures contracts particularly well suited for trading in organized exchanges.

Contract terms. To ensure the liquidity of exchange-traded futures markets, contracts

tend to be offered on standardized terms in terms of maturity, contract size, quantity and
quality of the underlying to be delivered, the time and place of delivery, the method of
payment, margining requirements and trading hours, among other characteristics.

Credit exposure. In futures contracts, the clearing house members and the clearing-
house itself guarantee fulfillment of futures contracts. The buyer and the seller both have

29
an exposure to the clearing house (and the clearing house to them), rather than to each
other.
Regulation. Since forwards are a bilaterally negotiated agreement, there is no formal
regulation of forwards nor is there a body to handle customer complaints. Exchange-
traded futures. on the other hand, are regulated by identifiable entities which are either
governmental (like the Commodity Futures Trading Commission in the U.S.) or set up by
the industry itself.

FINANCIAL FUTURES: USES AND USER

Uses. Financial futures can be used as devices for: (i) arbitrage or yield enhancement, (ii)
risk management and hedging, and (iii) taking trading positions on the basis of market
views (or "speculating," to put it in more blunt terms).

arbitrage. Sometimes the prices of futures can be related as well to those of other
derivatives which are based on the same (or similar) underlying commodities. Examples
of related derivatives are interest rate swaps and interest rate futures, and futures on
three-month LIBOR and on one-month LIBOR By isolating each characteristic of some
underlying security with a derivative instrument, all arbitrage risk can be eliminated.

Risk management. Hedging can be performed on a single tansaction (or instrument)

basis or on an aggregate (portfolio or firm) basis. Examples of single transaction hedging
might include anticipatory hedging for debt or equity security issuance or currency
hedging for foreign trade transactions. Examples of aggregate furm hedging include
asset-liability gap management and portfolio duration management Financial futures are
particularly apt for managing foreign currency and interest rate risk.

Expressing market views. Financial futures are an efficient way of taling bets on the
market on the basis of traders' views, whether these are fimdamental (i.e., driven by
economic conditions and trends) or technical (i.e., based on observed short-term price
movements). Such trades by definition cannot (indeed, should not) be fully hedged,

30
although trade construction might be such as to immunize particular kinds (or
dimensions) of risk. Unlike pure arbitrage, expressing market views is not riskless.
Futures can be used to express views on general market direction, the timing of expected
market movements, changes in the spread between market segments (e.g., credit,
commodity quality or cross-country differences), or a combination of these.

Users.
The users of financial futures are naturally given by their uses. Financial institutions,
including commercial banks, brokerage firms, investment banks, fund managers and
insurance companies will use futures for their thrc:- basic functions. Non-financial
corporations, including municipal and state organizations and foundations are more likely
to use them to hedge their commercial, investment or borrowing activities. Individuals
and locals a:e more likely to use them for speculation and arbitrage.

WORLD FUTURES EXCHANGES

Exchanges are formal organizations whose purpose is to concentrate order flow in order
to facilitate competition and to reduce transaction costs involved in searching for
counterparties. The principal financial futures exchanges in the world are:
Chicago Mcrcantile Exchange (CME, or the "Merc")
Chicago Board of Trade (CBOT)
Tokyo International Financial Futures Exchange (TIFFE)
Tokyo Stock Exchange (TSE)
London Intemational Financial Futures and Options Exchange (LIFFE)
Marche a Terme International de France (MATIF) in Paris
Singape-e Interational Monetary Exchange (SIMEX)
Deutsche Terminborse (DTB) in Frankfurt
New York Futures Exchange (NYFE)
Mercado Espafhol de Futuros y Opciones Financieras (MEFF) in Barcelona

31
2.4 OBJECTIVES OF THE STUDY
• To study on the financial futures with reference to NSE Nifty.
• To study the volatility of futures with reference to Banking and Pharmaceutical
industries.
• To study the amount of risk of Financial Futures of NSE in the month of March
with reference to Banking and Pharmaceutical industries.

2.5 SCOPE OF THE STUDY:

This study is done mainly under the ten companies of NSE Nifty. The results cannot be
generalized.

2.6 RESEARCH METHODOLOGY

This study entitled ‘A study on the role of Financial Futures with reference to NSE Nifty
is mainly done in Banking and Pharmaceutical industry. Secondary data is mainly used
for the study. Five companies from Banking and five from Pharma industry are taken for
the study.

2.7 TOOLS FOR DATA COLLECTION

Secondary Data: It is collected from books, journals, internet, magazines etc..

32
2.8 METHOD OF ANALYSIS
The formula used for calculation are:

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
X = market return
For calculating ‘x’ the NSE share price is taken.

X= closing price – opening price * 100

Opening price

Y = stock return
For calculating ‘y’ the NSE future value is taken

Y= closing price – opening price *100

Opening price

2.9 LIMITATIONS OF THE STUDY

Time constrains
Geographical constraints
This is restricted to Banking and Pharmaceutical Industry

33
2.10 CHAPTER SCHEME
Chapter 1: Introduction deals with the introduction to futures, subject
background of the study and need for the study.
Chapter 2: Research Design deals with the statement of the problem, review of
literature, objectives, scope of the study and about the methodology used by the
study.
Chapter 3: It deals with the Company Profiles of ICCI Bank, Corp Bank, Punajb
National Bank, Syndicate Bank, IOB, Ranbaxy, Dabur, CIPLA, Glaxo and Sun
Pharma.
Chapter 4: This chapter deals with the Analysis and Interpretation of Data
Chapter 5: It gives the Summary of Findings, Conclusion and Recommendations.

34
 CHAPTER 3
PROFILE OF COMPANIES

35
3.1 ICICI BANK

ICICI Bank
Type Private
BSE & NSE:ICICI, NYSE: IBN

Founded 1955 (as Industrial Credit and Investment

Corporation of India)

Headquarters ICICI Bank Ltd.,

ICICI Bank Towers,
Bandra Kurla,
Mumbai India

Key people N Vaghul, K.V.Kamath, Nachiket Mor,

Chanda Kochhar

Products Loans, Credit Cards, Savings, Investment

vehicles, SBI Life (Insurance) etc.

Revenue USD 5.79 billion

Website www.icicibank.com

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is

India's largest private sector bank and second largest overall. ICICI Bank has total assets
of about USD 56 Billion (end-Mar 2006), a network of over 619 branches and offices,
and about 2400 ATMs. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment banking, life
and non-life insurance, venture capital and asset management. ICICI Bank's equity shares
are listed in India on stock exchanges at Kolkata and Vadodara, the Stock Exchange,
Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on
the New York Stock Exchange (NYSE). During the year 2005 ICICI bank was involved
as a defendant in cases of alleged criminal practices in its debt collection operations and
alleged fraudulent tactics to sell its products

36
ICICI was established by the Government of India in the 1960s as a Financial Institution
(FI, other such institutions were IDBI and SIDBI) with the objective to finance large
industrial projects. ICICI was not a bank - it could not take retail deposits; and nor was it
required to comply with Indian banking requirements for liquid reserves. ICICI borrowed
funds from many multilateral agencies (such as the World Bank), often at concessional
rates. These funds were deployed in large corporate loans.

All this changed in 1990s. ICICI founded a separate legal entity - ICICI Bank which
undertook normal banking operations - taking deposits, credit cards, car loans etc. The
experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in
2002.

At the time of the reverse merger, there were rumours that ICICI had a large proportion
of Non Performing Loans ("NPA", as they are known in India) on its books - in particular
to the steel industry. Since 2002, there has been a general revival in Indian industry (and
metal based industry in particular). It is widely believed that the proportion of NPAs has
come down to prudent levels (even if it were high earlier).

ICICI Bank now has the largest market share among all banks in retail or consumer
financing. ICICI Bank is the largest issuer of credit cards in India .It was the first bank to
offer a wide network of ATM's and had the largest network of ATM's till 2005, before
SBI caught up with it.

ICICI bank now has the largest market value of all banks in India, and is widely seen as a
sophisticated bank able to take on many global banks in the Indian market.

The bank is expanding in overseas markets. It has operations in the UK, Hong Kong,
Singapore and Canada. It acquired a small bank in Russia recently. It has tie-ups with
major banks in the US and China. The bank is aggressively targeting the NRI (Non
Resident Indian) population for expanding its business.

37
3.2 PUNJAB NATIONAL BANK

Punjab National Bank

Type Public (BSE, NSE:PNB)

Founded Lahore, 1895 (British India)

Headquarters New Delhi, India

Key people Chairman and M.D. Mr. S.C.Gupta

Industry Banking
Insurance
Capital Markets and allied industries

Products Loans, Credit Cards, Savings, Investment

vehicles, Insurance etc.

Revenue USD 2.32 billion (2005)

Slogan ...the name you can BANK upon

Website www.PNBIndia.com

Punjab National Bank (PNB), established in 1895 in Lahore by Lala Lajpat Rai, is the
second largest public sector commercial bank in India with about 4500 branches and
offices throughout the country. The Government of India nationalized the bank, along
with 13 other major commercial banks of India, on July 19, 1969.

38
3.3 SYNDICATE BANK

Syndicate Bank
Type Public (BSE & NSE)

Founded Udupi, 1925 (as Canara Industrial and

Banking Syndicate Limited)

Headquarters Head Office,

Manipal,
Karnataka India & Corporate Office
Bangalore

Key people Chairman C P SWARNKAR

Industry Banking,Insurance,Capital Markets and

allied industries

Products Loans, Credit Cards, Savings, Investment

vehicles, Bajaj Allianz Life Insurance
(Insurance) etc.

Revenue USD bil

Slogan Faithful and Friendly (English) &

Viswasaneeya Hitheshi (Sanskrit)

Website syndicatebank.in/

Syndicate Bank, established in 1925 in Udupi (Karnataka state, India) by Upendra

Ananth Pai, Vaman Kudva and Dr, T. M. A. Pai, is one of the oldest and major
commercial bank of India. At the time of its establishment, the bank was known as
Canara Industrial and Banking Syndicate Limited. The bank, along with 13 other major
commercial banks of India, was nationalized on 19th July, 1969, by the Government of
India.

The business started with a capital of Rs. 80,000. The first branch of the bank started its
operations in the year 1928 at Brahmavar in Dakshin Kannada District. By 1937 it had
secured its membership as a Clearing House at Mumbai. The primary objective of
business was to extended financial assistance to local weavers. Initially the bank
collected as low as 2 annas from the door steps of the depositors daily through its agents.

39
This type of system where in the agents of the bank come doorsteps to collect deposit is
still prevailing in India and is referred as Pigmy Deposit Scheme.

From 1953-1964, 20 banks merged with the Canara Industrial and Banking Syndicate
Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank
Limited. The name of the bank was changed to Syndicate Bank Limited in the year
1963 and the head office of the bank was shifted to Manipal. The bank expanded its
operations not only on the domestic front but also overseas. It took over Al Shabei
Finance and Exchange Co. in Doha (1983) and Musandam Exchange Co. in Muscat
(1984). By 1989 it opened its 1500th branch at Hauz Khas, Delhi. Currently it has over
1900 branches.

Syndicate Bank sponsored the first regional rural bank in India by name Prathama
Grameena Bank. The stocks of the Syndicate Bank are listed on Bombay Stock
Exchange, National Stock Exchange, Mangalore Stock Exchange and Bangalore Stock
Exchange.

3.4 CORPORATION BANK

CORPORATION BANK

40
 Type Public (BSE, NSE:CORPBANK)

Founded Udipi, 1906

Headquarters Corporation Bank,

CORPORATE OFFICE ,
Mangaladevi Temple Road
Pandeshwar
Mangalore 575 001 India

Key people Chairman B. Sambamurthy

Industry Banking

Products Loans, Credit Cards, Savings, Investment

vehicles, etc.

Revenue Rs 862.83 crore (2006)

Net income Rs 100.27 Crore (2006)[1]

Slogan A Premier Government of India Enterprise

Website www.corpbank.com

Corporation Bank, founded in 1906 in Udupi, Karnataka state, India, is one of the
Indian banks in public sector. The bank was founded with an initial capital of Rs. 5000
(USD 100), and first day’s canvassed resources of less than one USD 1, has currently (31
March 2004) 10,176 full time employees, and operates from several branches in India.

The Bank is a Public Sector Unit with 57.17% of Share Capital held by the Government
of India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and
37.87% of Share Capital is presently held by the Public and Financial Institutions. The
Bank’s Net Worth stood at Rs.3, 054.92 crores as on 31 March 2005.

The bank has the distinction of the first Indian bank to publish its financial results (1998-
99) conforming to US GAAP.

3.5 INDIAN OVERSEAS BANK

IOB

41
Indian Overseas Bank (IOB) was founded on February
10th 1937, by Shri.M.Ct.M. Chidambaram Chettyar, a
pioneer in many fields - Banking, Insurance and
Industry with the twin objectives of specializing in
foreign exchange business and overseas banking.

IOB had the unique distinction of commencing business

on 10th February 1937 (on the inaugural day itself) in
three branches simultaneously - at Karaikudi and
Chennai in India and Rangoon in Burma (presently
Myanmar) followed by a branch in Penang.

At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. Deposits stood
at Rs.6.64 Crs and Advances at Rs.3.23 Crs at that time.

3.6 RANBAXY LABORATORIES

42
 Ranbaxy Laboratories Limited
Type Public

Founded 1961

Headquarters Gurgaon, Haryana, India

Key people Tejendra Khanna, Chairman

Brian Tempest, Chief Mentor,

Executive Vice Chairman

Malvinder Mohan Singh, CEO &

MD
Industry Pharmaceutical
Products Generic drugs
Revenue $1.178 billion (2005)
Employees 1100 in R&D
Website www.ranbaxy.com

Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. It is India's

largest pharmaceutical company. It exports its products to 125 countries with ground
operations in 46 and manufacturing facilities in seven countries. It is ranked among the
top 10 generic companies worldwide. The CEO of the company is Malvinder Mohan
Singh.

Ranbaxy went public in 1973.

3.7 CIPLA

CIPLA Limited

43
 Type

Founded 1935

Headquarters Mumbai, India

Key people Y. K. Hamied (CMD), Chairman

Industry Pharmaceuticals

Revenue Rs. 24.8 billion (2005)

Net income Rs. 4.1 billion (2005)

Employees ???

Website www.cipla.com

Cipla founded as The Chemical, Industrial & Pharmaceutical Laboratories is a major

Indian pharmaceutical company, best-known for manufacturing economical anti-AIDS
drugs. The company was founded in 1935 by Khwaja Abdul Hamied, and its Chairman
today is Yusuf Hamied (b. 1936), the founder's eldest son.

Today (2007), Cipla is the world's largest manufacturer of antiretroviral drugs to fight
HIV/AIDS, as measured by units produced, distributed and sold (multinational brand-
name drugs are exponentially more expensive, so in money terms Cipla's medicines are
probably not in top spot).

Cipla ignores foreign patents on these drugs where no Indian law is broken in the process.
By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from
$12,000 (and beyond) to around $300 per year. While this sum remains out of reach for
many millions of people in 'Third World' countries, charitable sources often are in a
position to make up the difference for destitute patients.

The customary treatment of AIDS consists of a cocktail of three drugs. Cipla produces an
all-in-one pill called Triomune which contains all three substances (Lamivudine,
stavudine and Nevirapine), something difficult elsewhere because the three patents are

44
held by different companies. One more popular fixed dose combination is there, with the
name Duovir-N. This contains Lamivudine, Zidovudine and Nevirapine.

3.8 DABUR

45
 Dabur
Type Public (NSE, BSE)

Founded 1884

Headquarters Ghaziabad

Key people V. C. Barman

Industry Health Care, Food

Products Dabur Amla, Dabur Chyawanprash,

Vatika, Hajmola & Real

Revenue Rs 1375,03 crore

Website www.dabur.com

Dabur India Limited is the fourth largest FMCG Company in India with interests in
Health care, Personal care and Food products. It is most famous for Dabur Chyawanprash
and Hajmola.

Dabur has a turnover of approximately Rs. 19 billion (approx. US$ 420 million) during
the fiscal year 2005-2006, with brands like Dabur Amla, Dabur Chyawanprash, Vatika,
Hajmola & Real. Their growth rate rose from 10% to 40%. In two years the growth rate
expected by them to change two folds. Dabur operates in more than 5 countries and has
sales worldwide. The company was founded by Dr. S.K. Burman in 1884 as a small
pharmacy in Calcutta (now Kolkata), West Bengal, India, and is now led by his great-
grandson V.C. Burman. The company headquarters are in Ghaziabad, Uttar Pradesh,
India, near the Indian capital of New Delhi, where it is registered. Dabur has
manufacturing operations in India, Africa and the United Arab Emirates. Hospitals,
schools and call centers, as well as exports to Australia, West Asia, Africa and Europe.

The company, through Dabur Pharma Ltd.b does toxicology tests and markets ayurvedic
medicines in a scientific manner. They have researched new medicines which will find
use in O.T all over the country therein opening a new market.

46
Dabur Foods, a subsidiary of Dabur India is expecting to grow at 25%, has project sales
of Rs 100 crore in next three years. Dabur foods mainly supplied beverages to
institutional customers. It will therefore increase its range of products to include tomato
based products.

3.9 SUNPHARMA
Sun Pharmaceutical Industries (Sun Pharma) is a major producer of
specialty pharmaceuticals and active pharmaceutical ingredients. The
company was set up in 1993 and now has sales worth Rs.12 billion.. In

47
 1996, Sun Pharma acquired the U.S., Detroit-based Caraco Pharm Labs.
The same year the company also acquired Dadha Pharma in Tamil Nadu.

Business

Sun Pharma brands are prescribed in chronic therapy areas like cardiology, psychiatry,
neurology, gastroenterology, diabetology, and respiratory.

3.10 GLAXOSMITHKLINE

GlaxoSmithKline
Type Public (LSE: GSK
NYSE: GSK)

Founded 2000, by merger of Glaxo Wellcome

and Smith Kline Beecham

Headquarters Brentford, London, United Kingdom

Key people Sir Chris Gent, Chairman

Jean-Pierre Garnier, Chief Executive
Julian Heslop, Chief Financial Officer

Industry Pharmaceutical

Products www.gsk.com/products

Revenue £23.2 billion (2006)

Net income £7.8 billion (2006)

Employees Over 100,728 (2005)

Slogan "Do more, feel better, live longer"

Website www.gsk.com

GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical,

biologicals, and healthcare company. GSK is a research-based company with a wide
portfolio of pharmaceutical products covering anti-infectives, central nervous system
(CNS), respiratory, gastro-intestinal/metabolic, oncology and vaccines products. It also

48
has a Consumer Healthcare operation comprising leading oral healthcare products,
nutritional drinks and over the counter (OTC) medicines

49
 CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

Table 4.1
ANALYSIS OF ICICI BANK
Date X Y X2 XY

50
01-03-2007 1.82 1.098 3.3124 1.98
02-03-2007 -0.835 1.098 0.6972 0.916
05-03-2007 0.737 1.329 0.5432 -0.979
06-03-2007 0.343 0.167 0.0403 0.057
07-03-2007 -6.101 -2.831 37.2222 17.271
08-03-2007 3.850 4.192 14.8225 16.139
09-03-2007 1.497 -1.546 2.2410 -2.314
12-03-2007 0.427 0.630 0.1823 0.269
13-03-2007 0.728 1.225 0.5299 0.892
14-03-2007 0.595 -0.152 0.3540 -0.090
15-03-2007 -1.329 -1.781 1.7662 2.366
16-03-2007 -2.409 -1.546 5.8032 3.724
19-03-2007 -0.658 1.330 0.4329 -0.875
20-03-2007 -1.175 -0.453 1.3806 0.532
21-03-2007 5.138 4.145 26.3990 21.297
22-03-2007 -7.291 3.347 53.1586 -24.402
23-03-2007 2.482 -0.791 6.1603 -1.963
26-03-2007 -2.591 -1.780 6.7312 4.612
28-03-2007 -0.952 -1.201 0.9063 1.143
29-03-2007 -0.482 -0.678 0.2323 0.326
30-03-2007 -0.924 0.389 0.8537 -0.359
Σx = -7.13 Σy = 1.337 Σ x2 = 163.7693 Σxy = 40.56

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21*40.56 - -7.13* 1.337

21* 163.7693 – (-7.13) 2

= 851.76 - -9.532

51
 3439.15 – 50.836
= 861.292
3388.314
= 0.254

Table 4.1 shows the beta value of ICICI futures and Nifty futures. Since the
beta value is less than one, ICICI futures are less volatile. Therefore
investment in ICICI futures is less risky.

52
 Table 4.2
ANALYSIS OF CORPORATION BANK
Date X Y X2 XY
01-03-2007 -0.906 3.588 .8208 -3.250
02-03-2007 -6.50 -4.214 42.25 27.391
05-03-2007 -3.931 -0.378 15.452 1.485
06-03-2007 -3.354 -3.008 11.249 10.088
07-03-2007 -3.673 -3.923 13.490 13.232
08-03-2007 3.333 3.896 11.108 12.985
09-03-2007 -3.369 -2.004 11.350 6.751
12-03-2007 -3.078 -1.931 9.474 5.943
13-03-2007 -0.087 0.392 0.007 -0.034
14-03-2007 -1.770 0.223 3.132 -0.394
15-03-2007 -3.905 -5.874 15.249 22.937
16-03-2007 1.901 1.593 3.613 3.028
19-03-2007 1.614 0.919 2.604 1.483
20-03-2007 1.538 12.363 2.365 19.014
21-03-2007 4.505 5.211 20.295 23.475
22-03-2007 2.388 3.508 5.702 8.377
23-03-2007 6.181 7.134 38.204 44.095
26-03-2007 3.515 3.760 12.355 13.216
28-03-2007 -2.864 -2.048 8.202 5.865
29-03-2007 1.381 -0.615 1.907 -0.849
30-03-2007 -0.601 -0.259 0.361 0.155
Σx = -7.682 Σy = 18.333 Σ x2 = 229.18 Σxy = 592.02

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2

53
 = 21*592.02 - -7.682 * 18.333

21* 229.18 – (-7.682) 2

= 12432.42 - -140.834
4812.78 – 59.013
= 12573.254
4753.767
= 2.644

Table 4.2 shows the beta value of ICICI futures and Nifty futures. Since the
beta value is more than one i.e. 2.644, Corporation Bank futures are highly
volatile. There fore investment in Corporation Bank is high risky.

Table4.3
ANALYSIS OF INDIAN OVERSEAS BANK (IOB)
Date X Y X2 XY
01-03-2007 0.096 2.831 .009 -0.271
02-03-2007 1.338 -0.658 1.790 0.880
05-03-2007 -5.212 -0.076 27.164 0.396
06-03-2007 -7.299 -3.492 53.275 25.488
07-03-2007 -2.361 -4.552 5.574 10.747
08-03-2007 1.808 2.490 3.268 4.501
09-03-2007 -1.084 -4.113 1.175 4.458
12-03-2007 0.574 -1.170 0.329 -0.671
13-03-2007 2.313 2.836 5.349 6.559
14-03-2007 2.526 0.952 6.380 2.404
15-03-2007 -1.303 -2.538 1.697 3.307
16-03-2007 1.268 -0.395 1.607 -0.500
19-03-2007 -0.310 -0.705 0.096 0.218

54
20-03-2007 3.326 2.902 11.062 9.652
21-03-2007 3.000 4.463 9.00 13.389
22-03-2007 -0.607 2.204 0.368 -1.337
23-03-2007 -1.140 -3.214 1.299 3.663
26-03-2007 -1.677 -4.418 2.812 7.408
28-03-2007 1.455 -2.126 2.117 -3.093
29-03-2007 -0.959 -3.315 0.919 3.179
30-03-2007 -1.674 0.077 2.802 -0.129
Σx = -8.79 Σy = -12.017 Σ x2 = 138.083 Σxy = 90.248

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21* 90.248 - -8.79* -12.017

21* 138.03 – (--8.79) 2

= 1895.208 - -105.63
2898.63 – 77.26
= 1789.578
2821.37
= 0.634

Table 4.3 shows the beta value of IOB futures and Nifty futures. Since the
beta value is less than one, IOB futures are less volatile. There fore
investment in IOB futures is less risky.

55
 Table 4.4

ANALYSIS OF SYNDICATE BANK

Date X Y X2 XY
01-03-2007 1.091 2.831 1.190 3.088
02-03-2007 -2.232 -0.658 4.982 1.468
05-03-2007 4.344 -0.076 18.870 -0.330
06-03-2007 -2.781 -3.492 7.733 9.711
07-03-2007 -4.257 -4.552 18.122 19.377
08-03-2007 2.832 2.490 8.020 7.051
09-03-2007 -3.485 -4.113 12.145 14.333
12-03-2007 -0.787 -1.170 0.619 0.920
13-03-2007 2.443 2.836 5.968 6.928
14-03-2007 -0.078 0.952 0.006 -0.074
15-03-2007 -2.015 -2.538 4.060 5.114
16-03-2007 -0.791 -0.395 0.625 0.312
19-03-2007 -1.018 -0.705 1.036 0.717
20-03-2007 1.939 2.902 3.759 5.626
21-03-2007 -0.072 4.463 .005 -0.321
22-03-2007 1.267 2.204 1.605 2.792
23-03-2007 -4.965 -3.214 24.651 15.957
26-03-2007 -6.500 -4.418 42.25 28.717
28-03-2007 -2.431 -2.126 5.909 5.168
29-03-2007 -1.953 -3.315 3.814 6.474
30-03-2007 0.788 0.077 0.620 0.060
Σx = -18.661 Σy = -11.414 Σ x2 = 165.989 Σxy = 133.088

Source: Secondary Data

56
β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21* 133.088 - -18.661* -11.414

21* 165.989 – (-18.661) 2

= 2794.848 - -212.996
3485.769 – 348.23
= 2581.852
3137.539
= 0.822

Table 4.4 shows the beta value of Syndicate Bank futures and Nifty futures.
Since the beta value is less than one in the month of March, the Syndicate
bank futures are less volatile and the investment in syndicate bank futures is
less risky.

Table 4.5
ANALYSIS OF PUNJAB NATIONAL BANK
Date X Y X2 XY
01-03-2007 3.563 5.809 12.694 20.697
02-03-2007 -7.119 -3.984 50.680 28.362
05-03-2007 8.492 0.719 72.114 6.105
06-03-2007 1.738 1.801 3.020 3.130
07-03-2007 -1.832 -1.823 3.356 3.339

57
08-03-2007 1.721 1.732 2.961 2.980
09-03-2007 -1.453 -2.093 2.111 3.041
12-03-2007 -0.322 0.825 0.103 0.265
13-03-2007 1.198 2.768 1.435 3.316
14-03-2007 -1.606 -1.394 2.579 2.238
15-03-2007 -1.953 -3.195 3.814 6.239
16-03-2007 -1.391 0.143 1.934 -.198
19-03-2007 0.580 0.271 0.336 0.157
20-03-2007 1.857 1.053 3.448 1.955
21-03-2007 2.859 3.696 8.173 10.566
22-03-2007 5.447 5.001 29.669 27.240
23-03-2007 3.534 -1.069 12.489 -3.778
26-03-2007 -1.052 -1.811 11.067 1.905
28-03-2007 -2.158 -1.435 4.656 3.096
29-03-2007 4.920 2.863 24.206 14.085
30-03-2007 -0.168 -0.948 0.028 0.159
Σx = 16.955 Σy = 8.929 Σ x2 = 250.873 Σxy = 134.899

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21* 134.899 – 16.955* 8.929

21* 250.873 – (16.955) 2

= 2832.879 – 151.391
5268.333 – 287.472
= 2681.488
4980.861
= 0.538

58
Table 4.5 shows the beta value of Punjab National Bank futures and Nifty
futures. Since the beta value is less than one, the futures of PNB is less
Date X Y X2 XY
01-03-2007 -0.363 1.294 0.132 -0.469
02-03-2007 0.666 0.710 0.443 0.473
05-03-2007 -7.178 -5.047 51.524 36.227
06-03-2007 -0.830 -0.475 0.689 0.394
07-03-2007 -4.580 -5.381 20.976 2.645
08-03-2007 5.278 5.096 27.793 26.866
09-03-2007 -2.380 -3.446 5.664 8.201
12-03-2007 -1.295 -0.260 1.667 0.336
13-03-2007 -0.942 -1.059 0.887 0.997
14-03-2007 -1.343 0.176 1.803 -0.236
15-03-2007 -1.503 -1.673 2.259 2.514
16-03-2007 0.397 0.655 0.156 0.260
19-03-2007 -0.798 0.031 0.636 -0.024
20-03-2007 5.472 5.063 29.942 27.704
21-03-2007 -2.485 -1.660 6.175 4.125
22-03-2007 -0.299 -0.328 0.089 0.098
23-03-2007 -1.226 -0.316 1.503 0.387
26-03-2007 -1.786 -1.189 3.189 2.213
28-03-2007 3.957 3.858 15.657 15.266
29-03-2007 1.353 2.329 1.830 3.151
30-03-2007 1.343 0.696 1.803 0.934
ΣX=-8.548 ΣY=-0.926 ΣX2=174.83 ΣXY=132.062
volatile and investing in Punjab National Bank futures is less risky.

Table. 4.6
RANBAXY

Source: Secondary Data

59
β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21*132.062 - -8.548 * -0.926

21* 174.83 – (-8.548) 2

= 2773.302 – 7.915
3671.43 – 73.068
= 2765.387
3598.362
= 0.768

Table 4.6 shows the beta value of Ranbaxy futures. Since the beta value is
less than one, it is less volatile and investing in Ranbaxy futures is less risky.

Table 4.7

60
 SUNPHARMA

Date X Y X2 XY
01-03-2007 3.831 1.294 14.676 4.957
02-03-2007 2.005 0.710 4.020 1.423
05-03-2007 -0.737 -5.047 0.543 3.719
06-03-2007 0.744 -0.475 0.553 -0.353
07-03-2007 0.626 -5.381 0.392 -3.368
08-03-2007 -0.093 5.096 0.008 -4.739
09-03-2007 0.974 -3.447 0.948 -3.357
12-03-2007 2.687 -0.261 7.219 -0.701
13-03-2007 3.390 -1.071 11.492 -3.630
14-03-2007 -2.689 0.176 7.230 -0.473
15-03-2007 -0.697 -1.672 0.486 1.165
16-03-2007 -0.261 0.655 0.068 -0.171
19-03-2007 -0.667 0.031 0.445 -0.020
20-03-2007 -1.481 5.062 2.193 -7.496
21-03-2007 -0.152 -1.660 0.023 0.252
22-03-2007 0.155 -0.328 0.024 -0.051
23-03-2007 -0.362 -0.316 0.131 0.114
26-03-2007 -1.466 -1.189 2.149 1.743
28-03-2007 -2.962 3.358 8.773 -11.427
29-03-2007 -0.088 2.329 0.007 -0.204
30-03-2007 3.981 0.696 15.848 2.770
ΣX= 6.738 ΣY= -0.94 ΣX2= 77.228 ΣXY=
-19.847

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21*-19.847 – 6.738 * -0.94

61
 21* 77.228 – (6.738) 2
= -416.787 - -6.336
1621.788 – 45.40
= -410.451
1576.388
= -0.26

Table 4.7 shows the beta value of Sun Pharma’s futures. Since the beta value
of this future is negative, this shows that when the market return of the
futures is increasing its stock value is coming down.

Table 4.8
DABUR

Date X Y X2 XY
01-03-2007 -3.131 -0.433 9.803 1.356
02-03-2007 2.152 -2.218 4.631 -5.572
05-03-2007 -2,946 -3.446 8.678 10.152
06-03-2007 -2.256 0.404 5.089 -0.911
07-03-2007 0.870 -2.956 0.756 -2.572
08-03-2007 0.382 2.718 0.146 1.038
09-03-2007 -3.387 -4.121 11.472 13.957
12-03-2007 -3.489 -1.297 12.173 4.525
13-03-2007 0.223 -0.453 0.049 -0.101
14-03-2007 -1.011 -1.161 1.022 1.173
15-03-2007 -1.573 -0.988 2.474 1.554
16-03-2007 -3.428 -3.090 11.751 10.592
19-03-2007 -0.816 1.257 0.666 -1.025
20-03-2007 -2.151 -1.703 4.626 3.663
21-03-2007 5.054 2.500 25.542 12.635

62
22-03-2007 3.068 3.362 9.412 10.314
23-03-2007 1.687 1.311 2.845 2.212
26-03-2007 -2.467 -1.510 6.086 3.725
28-03-2007 -1.942 -1.210 3.771 2.349
29-03-2007 -4.023 1.001 16.184 -4.027
30-03-2007 4.359 2.193 19.001 9.559
ΣX= -14.825 ΣY= -9.84 ΣX = 155.907
2
ΣXY= 74.596

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21*74.596 - -14.825 * -9.84

21* 155.907 – (-14.825) 2

= 1566.516 – 145.878
3274.047 – 219.780
= 1420.638
3054.267
= 0.465

Table 4.8 shows the beta value of Dabur futures and Nifty futures. Since the
beta value is less than one, it is less volatile and the investment in Dabur
futures is less risky.

63
 Table 4.9
CIPLA

Date X Y X2 XY
01-03-2007 -2.586 -2.271 6.687 5.872
02-03-2007 -1.228 -2.324 1.507 2.854
05-03-2007 -2.557 -0.322 6.538 0.823
06-03-2007 -0.384 2.430 0.147 -0.933
07-03-2007 4.254 2.259 18.096 9.609
08-03-2007 1.961 2.653 3.845 5.202
09-03-2007 -3.312 -2.764 10.969 9.154
12-03-2007 0.150 1.731 0.023 0.259
13-03-2007 2.624 0.839 6.885 2.201
14-03-2007 0.435 -1.043 0.189 -0.454
15-03-2007 -3.066 -1.046 9.400 3.207
16-03-2007 -1.349 -2.046 1.819 2.760
19-03-2007 0.334 0.401 0.112 0.134
20-03-2007 2.901 0.818 8.416 2.373
21-03-2007 0.649 1.907 0.421 1.237
22-03-2007 1.422 -0.296 2.022 -0.421
23-03-2007 2.970 2.489 8.820 7.392
26-03-2007 -2.345 -1.446 5.449 3.390
28-03-2007 -5.086 -0.508 25.867 2.584
29-03-2007 -2.935 0.961 8.614 -2.820
30-03-2007 -0.692 -1.108 0.478 0.766
ΣX= -7.84 ΣY= 1.314 ΣX = 126.084
2
ΣXY= 55.189

Source: Secondary Data

64
β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21*55.189 - -7.84 * 1.314

21* 126.084 – (-7.84) 2

= 1158.969 - -10.302
2647.764 – 61.46
= 1169.271
2586.304
= 0.452

Table 4.2 shows the beta value of CIPLA futures and Nifty futures. Since the
beta value is less than one, it is less volatile and investing in CIPLA futures
is less risky.

Table 4.10
GLAXO

Date X Y X2 XY
01-03-2007 -0.013 1.814 .0001 -0.015
02-03-2007 -1.555 1.088 2.418 -1.691
05-03-2007 0.176 -4.298 0.030 -0.756
06-03-2007 0.482 1.120 0.232 0.539
07-03-2007 3.930 -2.230 15.445 -8.764

65
08-03-2007 0.589 2.142 0.347 1.262
09-03-2007 0.806 -4.202 0.649 -3.386
12-03-2007 0.025 2.214 0.0006 0.055
13-03-2007 1.557 1.437 2.424 2.237
14-03-2007 1.903 1.606 3.621 3.056
15-03-2007 0.025 -2.507 0.0006 -0.062
16-03-2007 0.851 -1.824 0.724 1.552
19-03-2007 -1.192 -4.392 1.421 5.235
20-03-2007 1.045 -3.1392 1.092 -3.280
21-03-2007 -0.944 -3.132 0.891 3.126
22-03-2007 -0.807 2.134 0.651 -1.867
23-03-2007 -1.458 1.925 2.126 -2.806
26-03-2007 7.353 1.948 54.066 1.432
28-03-2007 -2.138 -2.564 4.571 5.482
29-03-2007 -1.403 4.134 1.968 -5.800
30-03-2007 1.624 -3.236 2.637 -5.255
ΣX= 10.856 ΣY= -10.052 ΣX = 95.002
2
ΣXY= -9.706

Source: Secondary Data

β = n * Σxy – Σx . Σy
n Σ x2 – (Σx)2
= 21*-9.706 - 10.856 * -10.052

21* 95.002 – (-10.856) 2

= 203.826 - -109.1245
1995.042 – 117.853
= -94.7015
1877.189

66
 = -.05044

Table 4.2 shows the beta value of Glaxo futures and Nifty futures. Since the
beta value is negative it shows that when market return increases, stock
value is coming down.

CHAPTER 5

SUMMARY OF FINDINGS, CONCLUSIONS &

RECCOMMENDATIONS

67
5.1 FINDINGS:

The major findings of the study are:

1. In the month of March 2007, investing in ICICI futures, IOB, Syndicate Bank,
PNB, Ranbaxy, Dabur and CIPLA futures are less risky.
2. The study shows that investing in Corporation Bank futures is high risky.
3. The futures value of Glaxo & Sun Pharma is negative. It shows that when the
market value is increasing, its stock value will come down.
4. The financial future plays an important role in NSE Nifty. There is relationship
with share price movements of the valued of NSE futures.

68
5.2 CONCLUSION

A financial future is a futures contract on a short term interest rate. In finance, A futures
contract is a standardized contract, traded on a futures exchange, to buy or sell a certain
underlying instrument at a certain date in the future, at a specified price. Futures or future
contract at transferable specific delivery forward contracts. They are agreements between
two counter parties that fix the terms of an exchange, or that lock in the price today of an
exchange, which will take place between them at some fixed future date. The study
entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE
NIFTY’ was done with reference to Banking and Pharmaceutical industry. From the
banking industry futures of Icici bank, Corporation bank, Syndicate bank, Indian

69
Overseas Bank and Punjab National bank are taken. Ranbaxy, Glaxo, Cipla, Sun Pharma,
Dabur are the companies taken from the pharmaceutical industry.

5.3 RECOMMENDATIONS

1. Since the volatility of ICICI futures IOB, Syndicate Bank, PNB, Ranbaxy, Dabur
and CIPLA futures are less the investors can invest in these futures.
2. In March 2007, the investment in Corporation Bank futures is highly risky, the
investors should be very cautious in investing into those futures.
3. Financial futures can be used to dwarfs the volume in traditional agricultural
contracts.
4. Futures will helps to allow economic agents to fine tune the structures of their
assets and liabilities to better suit their risk preferences and market expectations.

70
BIBLIOGRAPHY

71
Books:
• Chandra Prasanna, ‘Investment Analysis and Portfolio Management’, Tata
McGraw Hill Publishing company, 6th edition.

• Bhalla V K, ‘Investment Management and Security analysis’, Sultan Chand

Publications, 10th edition.

Journals:
• DALAL STREET, Investment Journal, Vol.XXII, No. 05 Feb 19- March 04,
2007.

• Money and Finance, Vol.III, November 9, 2007.

72
Website:
www.NSE India.com
www.Money control .com

73