Professional Documents
Culture Documents
Investment is the employment of funds with the aim of earning additional income
or capital appreciation. It has two attributes: time and risk. The sacrifice that has to be
made by the investor is certain but the return in the future is uncertain. Every investor is
exposed to risk of market price fluctuations. Derivatives were evolved to curtail the risk
of market price fluctuations in the commodity market. Derivatives have been in use way
back in 13th century onwards and later it was developed for the securities market.
Similarly, prices of shares, debentures, bonds and other security are also subject
to continuous change. Those who are charged with responsibilities of managing their own
money or of others are therefore constantly exposed to their threat of risk. In the same
way, the foreign exchanges are also subject to continuous change. Thus an importer of a
certain machinery is not sure the amount that he would have to pay in a rupee terms when
the payment becomes due.
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Risk reduction is one of the main issues of significance for the investor as it is
directly related to the return on investments. Risk reduction involves methods that reduce
the severity of the loss or the likelihood of the loss from occurring.
Some of the risk management technologies that can be used in the capital market are
Risk avoidance
Combination
Diversification
Risk transfer
Portfolio investment
Hedging
The most important use of derivatives is in transferring market risk, which act as a
protection against losses resulting from unforeseen price or volatility changes. Thus,
derivatives are a very important technique of risk management.
The use of this technique of management is not known to many of the players in the
market today. For instance, investment in futures and options came into existence in
order to reduce the risk. However, even those instruments are used for speculative
purposes because of the leverage it gives. The study tries to understand how index futures
are used for hedging or the risk in portfolio of shares. Therefore, the study is conducted to
analyze how to reduce the risk involved in the financial instrument by using index
futures, which is subset of the larger concept of derivatives.
2
The number of Nifty futures to be bought is rounded off to the nearest whole
number.
The data collected were based on NSE alone for the case of Hedging
The number of shares under study is very small so it’s not represent the
performance of the entire market.
Capital market in India is always affected with uncertainty. Anything can happen in
the market. A stock picker carefully purchase securities based on a sense that they are
worth more than the market price. While doing so he faces a risk that the entire market
moves against him and generates losses even though the underlying idea was correct to
exit from this we have to make securities independent from index through hedging with
index futures. Hedging with index futures removes the unwanted exposure of index
movement.
OBJECTIVES
• Identifying the Various Arbitrage opportunities existing In Indian Stock Market
• Analyzing how an investor can reduce his risk (on Portfolio) through Hedging
The derivatives especially financial derivatives are now days having emerging trend
in the financial market. The financial derivatives are used to minimize the losses of
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investors. The investors, who are ready to take risk, can maximize their profit by using
derivatives. Hence the financial derivatives are popular in the financial market.
The study is attempted to assess the power of hedging technique using index futures.
The main aim of the study is to know whether the investor can minimizes his losses and
make maximum return compared to other investments.
RESEARCH METHODOLOGY
The study is purely based on secondary. Data collected from journal books and
websites, along with the trade participant and authorized brokers. Already established
hedging strategies in these futures and options have been identified and were applied in
the data collection from various secondary sources.
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CHAPTER 2
INDUSTRY PROFILE
5
INDUSTRY PROFILE
Indian stock markets are one of the oldest in Asia. Its history dates back to nearly
200 years ago. The earliest records of security dealings in India are meager and obscure.
The east India Company was dominant institution in those days and business in its loan
securities used to be transacted towards the close of the eighteenth century. By 1830’s
business on corporate stocks and shares in Bank and cotton presses took place in Bombay.
Though the trading list was broader in 1839, there were only half a dozen Brokers
recognized by banks and merchants during 1840 and 1850. The 1850’s witnessed a rapid
development of commercial enterprise and brokerage business attracted many men into
the field and by 1860 the number of brokers increased to 60. In 1860-61 the American
Civil War broke out and cotton supply from United States of Europe was stopped.; thus
the ‘share Mania’ in India begun. The number of brokers increased to about 200 to 250.
However at the end of the American civil war in 1865, a disastrous slump began. At the
end of American civil war, the brokers who thrived out of civil War in 1874, found a place
in a street (now approximately called as Dalal Street) where they could conveniently
assemble and transact business. In 1887, they formally established in Bombay the “Native
share and stock broker’s association” (which is alternatively known as “stock exchange”).
In 1895, the stock exchange acquired a premise in the same street and it was inaugurated
in 1899. Thus, the Stock exchange at Bombay was consolidated.
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The securities Contract Regulation Act of 1956 define the stock exchange as “ an
association, organization or body of individuals whether incorporated or not established
for the purpose of assisting regulating and controlling business in buying, selling and
dealing in securities”.
A stock market is typically a market where the trading of company stocks and
derivatives is carried out. In order to be traded in the stock market, the securities need to
be listed in the stock exchange. The corporations and government s issue their securities
in the stock market thus going public and raising additional capital for their business or
further development. The liquidity nature of the stock market ensures the investors to sell
their securities easily and quickly. It has been seen that the economic activity of a country
is most importantly affected by the price of shares and other assets. For example the
rising trend of the shares may interpret that the business investment in the country is in
the growing stage. The prices of the shares also invariably affect the household wealth.
Hence the central bank of each country makes it a point to keep an eye on the activities
and behavior of the stock markets.
The Second World War broke out in 1939. It gave a sharp boom which was
followed by a slump. But in 1943, the situation changed radically, when India was fully
mobilized as a supply base. On account of the restrictive controls on cotton, bullion,
seeds and other commodities, those dealing in them found in the stock market as the only
outlet for their activities. They were anxious to join the trade and their number was
swelled by numerous other factors. Many new associations were constituted for the
purpose and the Stock Exchange in all parts of the country was floated. The Uttar
Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and
Hyderabad stock Exchange Limited (1944) were incorporated. In Delhi, two stock
exchanges-Delhi stock and shares exchange Limited were floated and later in June 1947,
amalgamated into the Delhi stock Exchange Association Limited.
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Most of the exchanges suffered almost a total eclipse during depression. Lahore
Exchange was closed during partition of the country and later migrated to Delhi and
merged with Delhi Stock Exchange. Bangalore stock exchange was registered in 1957
and recognized in 1963. Most of the other exchanges launched till 1957 when they
applied to the Central Government for recognition under the securities Contracts
(Regulation) Act, 1956. Only Bombay, Calcutta, Delhi, Hyderabad and Indore, the well
established exchanges were recognized under the Act. Some of the members of the other
Association were required to be admitted by the recognized stock exchange on a
confessional basis, but acting on the principal of unitary control, all these pseudo stock
exchanges were refused recognition by the Government of India and they thereupon
ceased to function. Thus, during early sixties there were eight recognized stock exchanges
in India. The number virtually remained unchanged, for nearly two decades. During
eighties, however many stock exchanges were established: Cochin Stock Exchange
(1981), Ludhiana Stock Exchange Association Limited (1983), Uttar Pradesh Stock
Exchange Association on Limited (at Kanpur, 1982), Pune Stock Exchange Limited
(1982), Guhati Stock Exchange limited (1984), Kanara Stock Exchange Association
Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),
Jaipur Stock Exchange Limited (1989), Saurashtra Kutch Stock Exchange Limited (1989),
Bhuvaneswar Stock Exchange Association Limited (1989), Vadodara Stock Exchange
limited (at Baroda, 1990) and recently established exchanges-Coimbatore and Meerut.
Thus at present, there are totally twenty one recognized stock exchanges in India
excluding the Over The Counter Exchange of India Limited (OTCEI) and the National
Stock Exchange of India Limited (NSEIL).
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normally, put in the specified group and the balance in non-specified group. Two types of
transactions can be carried out on the Indian Stock Exchanges;
Forward transactions
Spot delivery transactions includes delivery and payment within the time or on the date
stipulated when entering into the contract which shall not be more than 14 date of the
contract.
Forward transaction which includes delivery and payment can be extended further
period of 14 days each so that the overall period does not exceed 90 days from the date of
the contract.
A member broker in an Indian Stock Exchange can act as an agent, buy and sell
securities for his clients on a commission basis and also can act as a trader or dealer as a
principal, buy and sell securities on his own account and risk, in contrast with the practice
prevailing on New York and London Stock Exchanges, where a member can act as a
jobber or a broker only. The nature of trading on Indian Stock Exchanges are that of age
old conventional style of face-to-face trading with bids and offers being made by open
country. However, there is a great amount of effort to modernize the Indian Stock
Exchanges in very recent times.
The traditional trading mechanism prevailed in the Indian Stock markets gave
way to many f functional inefficiencies, such as, absence of liquidity, lack of transparency,
unduly long settlement periods and benami transactions, which affected the small
investors to a great extent. To provide improved services to investors, the country’s first
ring less, scrip less Electronic Stock Exchange-OTCEI-was created in 1992 by country’s
premier financial institutions-Unit Trust of India, Industrial Credit and Investment
Corporation of India, Industrial Development Bank of India, SBI capital markets,
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Industrial Finance Corporation of India, General Insurance Corporation and its
subsidiaries and can bank financial services.
Trading at OTCEI is done over the centers spread across the country. Securities
traded on the OTCEI are classified as follows;
Listed securities: The shares and debentures of the companies listed on the OTC
can be bought or sold at any OTC counter all over the country and they should not be
listed any were else.
Permitted Securities: Certain shares and debentures listed on other exchanges and
units of mutual funds are allowed to trade.
OTC has unique feature of trading compared to other traditional exchanges. That
is, certificates of listed securities and initiated debentures are not traded at OTC. The
original certificate will be safely with the custodian. But a counter receipt is generated out
at the counter which substitutes the share certificate and is used for all transactions. In the
case of permitted securities, the system is similar to a traditional stock exchange. The
difference is that the delivery and payment procedures will be completed within 14 days.
Compared to the traditional Exchanges, OTC Exchange network has the following
advantages;
OTCEI has widely dispersed trading mechanism across the country which
provides the greater liquidity and lesser risk of intermediary charges.
Greater transparency and accuracy of prices is obtained due to the screen based
scrip less trading.
Since the exact price of the transaction is shown on the computer screen based scrip
less trading.
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Faster settlement and transfer process compared to other exchanges.
In the case of an OTC issue, the allotment procedure is completed in a month and
trading in Investment Corporation commences after a month of the issue closure, where
as it takes a longer period for the same with respect to other exchanges.
Thus with the superior trading mechanism coupled with information transparency
investors are gradually become aware of the manifold advantages of the OTCEI.
With the liberalization of the Indian economy, it was found inevitable to lift the
Indian stock market trading system on par with the International standards. On the basis of
recommendations of high powered Pherwani Committee, the NSE was incorporated in
1992 by Industrial Development bank of India, Industrial Credit and Investment
Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations,
selected commercial banks and others.
Capital market
Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants include trading members and large players like
banks who take direct settlement responsibility. Trading at NSE takes place through a
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fully automated screen -based trading mechanism which adopts the principle of an order
driven market. Trading members can stay at their offices and execute the trading, since
they are linked through a communication network. The prices at which the buyer and
seller are willing to transact will appear on the screen. When the prices match, the
transaction will be completed and confirmation slip will be printed at the office of the
trading member.
NSE has many advantages over the traditional trading exchanges. They are as follows;
NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since inter-
market operations are streamlined coupled with the country wide access to the
securities.
The exchange while providing an efficient and transparent market for trading in
securities, debt and derivatives upholds the interest of the investors and ensures redressal
of their grievances whether against the companies or its own member brokers. It also
strives to educate and enlighten the investors by conducting investor education programs
and mailing available to them necessary informative inputs. A Governing Board having
twenty Directors is the apex body, which decides the policies and regulates the affairs of
the Exchange. The Governing Board consists of nine elected directors, who are from the
broking community (one third of them retire every year by rotation), three SEBI
Nominees, six public representatives and an Executive director and the Chief Executive
Officer and a Chief Operating Officer. The Executive Director and the Chief Executive
Officer is responsible for the day-to-day administration of the Exchange and he is assisted
by the Chief Operating Officer and other Heads of Departments.
The Exchange has inserted new Rule NO.126 and in its Rules, Bye-laws and
Regulations pertaining to constitution of the Executive committee, of the exchange are
included. Accordingly an executive committee, consisting of three elected directors, three
SEBI nominees or public representatives, Executive Directors, CEO and Chief Operating
Officer has been constituted. The committee considers judicial and quasi matters in which
the governing Board has powers as an Appellate Authority, matters regarding annulment
of transactions, admission, continuance and suspension of member-brokers, declaration of
member-broker as defaulter, norms, procedures and other matters relating to arbitration,
fees, deposits, margins and other monies payable by the member brokers to the Exchange,
etc.
STATE SCENARIO
The State Scenario is mainly based upon the growth and development of CSE.
CSE has been playing a vital role in the economic development of the country in general,
and Kerala in particular and striving hard to achieve its goals.
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The CSE Ltd., is one of the premier Stock Exchanges in India, established in the
year 1978. The exchange had a humble beginning with just 5 companies listed in 1978-
79, and had only 14 members. Today the exchange has more than 508 members and 240
listed companies. In 1980 the Exchange computerized its offices. In order to keep pace
with the changing scenario in the capital market, CSE took various steps including
trading in Dematerialized shares. CSE introduced the facility for Computerized trading –
“Cochin Online Trading (COLT)” on March 17, 1997. CSE was one of the promoters of
the “Interconnected Stock Exchange of India (ISE)”. The objective was to consolidate the
small, fragmented and less liquid markets into a national level integrated liquid market.
With the enforcement of sufficient margin system and surveillance, CSE has successfully
prevented defaults. Introduction of fast track system made CSE the stock exchange with
the shortest settlement cycle in the country at that time. By the dawn of the new century,
the regional exchanges faced a serious challenge from the NSE & BSE. To face this
challenge CSE promoted a 100% subsidiary called the “Cochin Stock Brokers Ltd.
(CSBL)” and started trading in the National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE).
The Cochin Stock Exchange would strive to make Kerala, “the state of fully
literate investors”. Definitely there is a long way to go, but CSE have started a beginning
Support from the Government Institutions – both from State and Central, and the
regulating authority SEBI, would help their efforts to provide the best technology at an
affordable cost to the investors.
TRADING
The exchange, as stated earlier, had an open outcry trading system till March
1995 where member brokers used to assemble in a trading ring for doing transactions in
securities. It had switched over to a fully automated computerized mode of trading
known as BOLT (BSE on Line Trading) System w.e.f. March 14, 1995. Through the
BOLT system, the member-brokers now enter orders for purchase or sell of securities
from Trader Work Stations (TWSs) installed in their offices instead of assembling in the
trading ring. This system, which was initially both order and quote driven, is currently only
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order driven. The facility of quotes has been discontinued w.e.f. August 13, 2001 in view
of lack of market interest and to improve system-matching efficiency. The system, which is
now only order driven, facilities more efficient inputting, processing, automatic matching
and faster execution of orders in a transparent manner.
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The exchange has for the guidance and benefit of investors classified the scrip in
the Equity segment ‘A’, ‘B1’ and ‘B2’ based on certain qualitative and quantitative
parameters which include number of trades, value traded etc. for the guidance and benefit
of investors. The ‘F’ group represents the fixed income securities wherein 730 securities
were listed as on June 30, 2003.The exchange has commenced trading in Govt. securities
for retail investors under ‘G’ group w.e.f. January 16, 2003 and 85 Govt. Securities are
traded on the exchange under this group as on June 30, 2003. The ‘Z’ group was
introduced by the exchange in July 1999 and includes the companies which have failed to
comply with the listing requirements of the Exchange and/or have failed to resolve
investor complaints or have not made the required arrangements with both the
depositories, viz; Central Depository Services Ltd. (CDSL) and National Securities
Once they finalize the arrangement for dematerialization of securities, trading and
settlement in their scrip would be shifted to their respective groups. The Exchange also
provides a facility to the market participants for on-line trading in ‘C’ group which covers
the odd lot securities in physical form in ‘A1’, ‘B1’, ‘B2’ and ‘Z’ groups and rights
renunciations in all the groups of scrip in the Equity segment. The scrip of the company
which are in demat can be traded in the market lot of one but the securities of the
companies which are still in the physical form are traded on the Exchange in the market lot
of generally either 50 or 100. However, the investors having quantities of securities less
than the market lot are required to sell them as “Odd Lots”. The facility of trading in odd
lots of securities not only offers an exit route to investors to dispose of their odd lots of
securities but also provides them an opportunity to consolidate their securities into market
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lots. The ‘C’ group facility can also be used by small investors for selling up to 500 shares
in physical form in respect of scrip of companies where trades are required to be
compulsorily settled by all investors demat scrip is called an Exit Route Scheme. With
effect from December 31, 2001, trading in all securities listed in equity segment of the
Exchanges take place in one market segment, viz; Compulsory Rolling Settlement
Segment.
In keeping with the broad thrust of the ongoing programmes of economic reform,
the mechanism of administrative controls over capital issues have been dismantled and
pricing of capital issue is now essentially market determined. Regulation of the capital
markets and the protection of investor’s interest is now primarily the responsibility of the
Securities and Exchange Board of India (SEBI), which is located in Bombay.
COMPANY PROFILE
INTRODUCTION
Cochin Stock Exchange (CSE) is one of the premier stock Exchanges in India.
Established in the year 1978, the exchange has undergone tremendous transformation
over the years. The exchange had a humble beginning with just 5 companies listed in
1978-79, and had only 14 members. The trading operation on the exchange commenced
in 198, which were till then carried out through the brokers located outside Kerala.
Today, the exchange has 240 listed companies and 508 members.
In 1989 the company went for computerization of its offices. In order to keep with
the pace with the changing scenario in the capital market CSE took various initiatives
including trading in dematerialized shares.
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exchange of India (ISE). The objective was to consolidate the small fragmented and less
liquid markets into a national level integrated liquid market.
With the enforcement margin system and surveillance, CSE has successfully
prevented defaults. Introduction of fast track system made CSE the stock exchange with
shortest settlement cycle in the country at that time. By the dawn of the new century, the
regional exchange faces the serious challenges from the NSE & BSE. To face this
challenge CSE promoted a 100% subsidiary called the Cochin Sand Stock Brokers Ltd
(CSBL) and started trading in the NSE and BSE.
CSBL is the first subsidiary of a Stock Exchange to get membership in both NSE
and BSE, and became a participant in the Central Depository Service Ltd (CDSL). The
CSE has been playing a vital role in the economic development of the country and the
state.
OWNERSHIP PATTERN
The exchange is professionally managed, under the overall direction of the Board
of Directors. The board comprises of eminent professors from various fields such as
legal, administration and management, who are popularly known as Public
Representatives Directors. The composition of the board is such that 3/4th of the total
strength of the board is now held by the Public Representatives Directors and the Govt.
and the Brokers of the Exchange represent SEBI nominee Directors and balance 25%.
This change at the board level is aimed to effectively address the concerns regarding
perceived and real conflicts of interest of the Broker Members in the management of the
Exchange.
VISION
• Providing investors with high level of liquidity whereby the cost and time
involved in the entry and exit from the market becomes the least.
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• Spread equity cult and to serve investors of the region.
• Built infrastructure for capital market by turning CSE into a financial super
market.
• Bring in high tech solutions and make possible absolute transparency of all
operations.
MISSION
“To play a vital role in the economic and industrial development of the region
and to protect investors.”
The CSE has been playing a vital role in the economic development of the country in
general, and Kerala in particular and striving hard so as to achieve the goals.
OBJECTIVES:
The various activities of CSE are centered on the following objectives, which
ensures the transparency of business for the investors as well as the right atmosphere for
capital mobilization for corporate.
• To facilitate foster, develop, assist, regulate and control the various stock related
activities.
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• To support and protect the character and the status of brokers and other dealers in
securities.
• To maintain high standards of commercial honor and integrity and to uphold the
code of ethics in the various operations of CSE.
• To regulate and fix the scale of commission and brokerage to be charged by the
members of the exchange.
4. Depository Participant
Front-End Software
CSBL offers its trade feed through Multex and ODIN front –end software: Multex
software combines NSE and BSE trade screens in a single monitor. This gives arbitrage
opportunities and operational convenience to traders and investors.
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Connectivity Options
Internet Trading
Depository Services
CSBL- Depository Participant with Central Depository Service Ltd. is one of the largest
service providers of its kind in the state. It offers to the investors personalized services.
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4. Primary Market
5. Day Trading
6. Investor Protection
7. Investor Education
ORGANIZATIONAL GOALS
• Providing investors with high level of liquidity where by the cost and time
involved in the entry and exit from the market becomes the least.
• Built Infrastructure for capital market by turning CSE into a financial super
market.
• Bring in high tech solutions and make possible absolute transparency of all
operations.
ORGANIZATIONAL STRUCTURE
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Board of Directors
Executive Director
The operation of any Stock Exchange can commence only with the recognition of the
central government under the Securities Contract Regulation Act, (SCR) 1956. The
various regulations concerning the listing of companies and the trading related activities
are provided under SCR rules 1957. The byelaws of the exchange gives guidelines on
opening/closing of CSE, timing of trading regulation of badly or carryover business,
fixation of margins making of prices, arbitration, settlement of disputes etc…
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DEPARTMENT FUNCTIONS:
The Cochin Stock Exchange carries on its function through twelve main
departments. There exist a very cordial relationship between each department in CSE and
the day to day operations are well delegated to each department through the staff
member at various levels. The council of management is the apex body, which
coordinates all the operations of the exchange. The executive director gives the guideline
to the heads of various departments.
• Finance Department
• Marketing Department
• Systems Department
• Legal Department
• Settlement Department
• Surveillance Department
• Administration Department
• Network Department
• Listing Department
• CDSL (Depository)
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CHAPTER 3
THEORITICAL FRAMEWORK
Arbitrage
A central idea in modern finance is the law of one price. This states that in a
competitive market, if two assets are equivalent from the point of view of risk and return,
they should sell at the same price. If the price of the same asset is different in two
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markets, there will be operators who will buy in the market where the asset sells cheap
and sell in the market where it is costly. This activity termed as arbitrage, involves the
simultaneous purchase and sale of the same or essentially similar security in two different
markets for advantageously different prices(Sharpe & Alexander 1990). The buying
cheap and selling expensive continues till prices in the two markets reach an equilibrium.
Hence, arbitrage helps to equalize prices and restore market efficiency
2.Operational issues
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these opportunities and act upon them, the arbitrage gets wiped out. The fastest instances
of arbitrage opportunities being wiped out, are those seen in the foreign exchange market.
This market trades currency in large volumes, so what seems like a small mispricing can
often translate into huge profits.
Trading involves transactions costs. These transactions costs and other market
imperfections create a no– arbitrage band around the fair value of an asset. Hence the
arbitrage opportunity must be sizeable enough to generate a profit over and above the
costs involved. Not all mispricing are profitable arbitrage opportunities.
Arbitrage is not a new concept in India. Although the level of activity was not
significant, market players have been engaging in inter–city arbitrage for a long time. A
fairly high level of arbitrage activity was seen across the two large exchanges in Bombay.
In India, we’ve had over a decade of experience with multiple stock exchanges
and line operators arbitraging between these markets. This has been a fairly well accepted
idea. These arbitrageurs mostly operated between Bombay, Ahmadabad, Calcutta and
Delhi. They used telephone lines & PTI screens to locate the difference in prices. The
main centers for arbitrage though were Bombay and Calcutta. Here is how the arbitrage
happened.
In the mid 90’s NSE & BSE went electronic and moved over to screen based
trading. The period witnessed huge volumes due to arbitrage across the exchanges. The
arbitrage process involved two people working as pairs. The pairs concentrated on one or
two scrips at a time. This process generated high returns, typically around 1 – 1.5 % per
week.
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The launch of the derivative markets in India has given rise to a whole new world
of arbitrage. Multiple products with the same underlying asset are now available for
trading. Mispricing across the spot, futures and options markets can led to profitable
arbitrage opportunities.
Launch of the options on the F&O segment in India has seen the growth of a new area for
arbitrage. The stocks can be arbitraged across the spot, futures and options market. Using
options one can create synthetic futures, which can be compared to the prevailing futures.
The synthetic futures can also be used in any of the thirty stocks where options are
allowed.
Around dividend declaration time, the stock options market can sometimes pose a
profitable arbitrage opportunity. Let us look at how this works. We know that the stock
price should decline by the dividend amount when the stock goes ex–dividend.
There will be a price mismatch between the share price movements in the opening of the
exchanges, which results from the demand & supply for the particular share in the
exchanges
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Exchange traded funds are innovative mutual fund products that provide exposure to an
index or a basket of securities that trades on the exchange like a single stock. They have a
number of advantages over traditional open–ended funds as they can be bought and sold
on the exchange at prices that are usually close to the actual intra–day NAV of the
scheme.
In September 2000, Nifty futures started trading in Singapore. While the trading activity
in Singapore has been erratic, there have been times when the trading volumes and open
interest for the Nifty futures contract trading in Singapore were higher than those on the
NSE.
The basic principles of an arbitrage strategy are straightforward – if an asset trades at two
different prices across two markets, buy where it trades cheap and sell where it trades
expensive. we look at some of the risks associated with arbitrage.
30
there can be variations in price between the time an arbitrage opportunity is entered into
and the time the trade is actually executed on the market.
An arbitrageur who enters into an arbitrage trade assumes that a particular level of
interest rate will remain constant. In the cash–and–carry strategy, the arbitrageur
assumes that he will be able to borrow at a certain rate till the expiration of the futures
contract.
When the markets are very volatile, the stock exchange imposes a circuit breaker on the
stocks. On NSE’s market, whenever the index moves by 10, 15 or 20 percent in one day,
NSE’s rule number 26528-6-2001 comes into play which halts trading.
Stock index futures normally trade at a premium to the cash index. The appearance of a
discount sends a strong signal that the futures may be underpriced. When a stock index
futures price is considered cheap relative to the stock index, arbitrageurs buy futures and
short the stocks in the index.
Index arbitrage involves the buying or selling of all the index stocks in the cash market.
This can be done by placing program trades. Due to lack of liquidity and proper depth in
the capital market segment, trades on this segment do not get implemented instantly.
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Real–world arbitrage requires putting up huge capital for a short period of time. Take the
case of cash and carry arbitrage. In order to capture the mispricing, the arbitrageur sells
the overpriced futures, buys the underlying stocks and holds them till the maturity of the
futures contract.
In India, from the regulatory and taxation point of view, trades undertaken to exploit
arbitrage are still regarded as speculative trades. This increases transactions cost on
arbitrage and impedes the development of arbitrage in India.
Hedge funds are among the most active participants in the arbitrage game. Most hedge
funds have schemes which involve engaging in purely arbitrage transactions. In the
absence of proper hedge funds regulations in India, there is very little hedge fund activity
in India.
Capturing an arbitrage opportunity involves following prices in two markets and entering
into trades simultaneously on both these markets. Successful arbitrage depends on
obtaining the correct prices across the two market and trading accordingly. Due to the
lack of adequate IT infrastructure, prices from various agencies are often received with a
time lag.
Hedging
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Hedge is a position established in one market in an attempt to offset exposure to
price fluctuations in some opposite position in another market with the goal of
minimizing one's exposure to unwanted risk. There are many specific financial vehicles
to accomplish this, including insurance policies, forward contracts, swaps, options, many
types of over-the-counter and derivative products, and perhaps most popularly, futures
contracts.
Investors studying the market often come across a security, which they believe is
intrinsically undervalued. It may be the case that the profits and the quality of the company
make it seem a worth lot more than what the market thinks. A stock picker carefully
purchases securities based on a sense that they are worth more than the market price.
When doing so investor faces two kinds of risks;
Investor’s understanding can be wrong and the company is really not worth more
than the market price, or
The entire market moves against the investor and generates losses even though the
underlying idea was correct.
So in order to protect the value of the investment, the investor need to reduce the
exposure to one or more kinds of risks. This can be achieved by hedging. So hedging is
defined as a position taken in futures, options or other contracts for the purpose of
reducing exposure to one or more kinds of risk.
HEDGING EFFECTIVENESS
HEDGING PROBLEM
33
The core problem when deciding upon a hedging policy is to strike a balance
between uncertainty and the risk of opportunity loss. It is in the establishment of the
balance that one must consider the risk aversion, the preferences, of the shareholders.
Setting hedging policy is a strategic decision, the success or failure of which can make or
break a firm.
A month after the launch of index future in the Indian market, index future has
not taken off the ground yet. One obvious reason for the lull is the lack of awareness
among investors. Another reason is the complicates and deviant procedure of margining
and market-to-market methods adopted by the exchanges. Like individual stocks, index
futures can be used for investment and trading. Unlike stocks, index futures can be used to
hedge the risk in a well diversified portfolio of stocks. Here the strategy employed is
“Have portfolio, short nifty”. It is explained as follows;
When one owns a portfolio of shares and there are chances that the market will fall
in the near future, it could be a very uncomfortable feeling or it could be that the market
is in a few days of volatility and the investor is not the kind one can handle such
anxiousness. The union budget being a common and reliable source of such volatility is
always enhanced for one week before or two weeks after a budget. This is particularly a
problem if it is required to sell shares in the near future, for example, for buying a car or
for financing children’s education. This planning can go for wrong if, by the time the
shares are sold, Nifty has dropped sharply. There are traditionally two things that one can
try in such situations as follows;
Sell shares immediately. This sentiment generates panic selling which is rarely
optimal for the investor.
Do nothing; i.e. just suffer the pain of the volatility. This leads to political pressures
for government to do something when the stock price falls.
Remove the exposure to the index fluctuations temporarily using index futures.
34
This allows rapid response to the market conditions, without panic selling of shares.
It allows an investor to be in total control of risk, instead of doing nothing and suffering
the risk.
The idea behind the above concept reveals that each portfolio contains a hidden
index exposure. This statement is true for all portfolios, whether a portfolio is composed
of index stocks or not. In the case of portfolios, most of the portfolio risk is accounted for
by index fluctuations (unlike individual stocks, where only 30-60% of the stock risk is
accounted for by index fluctuations). Hence a position LONG PORTFOLIO+SHORT
NIFTY can often become one tenth as risky as the LONG PORTFOLIO position.
At first the “beta” of the portfolio must be calculated, i.e. the average impact of a
1% move in nifty upon the portfolio.
This position will be essentially immune to fluctuations of Nifty. If Nifty goes up,
the portfolio gains and the future will loses. In either case the investor has no risk from
the market fluctuations when hedging is completed. The investor should adopt this
strategy for short periods of time period where;
When financial planning involves selling shares at a future date and would be
affected in nifty drops.
It does not make sense in use of this strategy for long periods of time if a two year
hedging is desired, it is better to sell the shares, invest the proceeds and buy back the
shares after two years. This strategy will make more sense for rapid adjustments.
Types of Hedging
35
Hedging can be mainly done in two ways, they are
INDEX FUTURES
Index futures are future contracts where the underlying asset is the index. This is of
great help when one wants to take a position on market movements. Suppose if an investor
feel that the market are bullish and the sensex would cross high points instead of buying
shares that constitute the Index one can buy the market by taking a position on the Index
future. Both the BSE and NSE have launched index future in June 2000.
Futures
Futures markets were designed to solve the problems that exist in forward markets. A
futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. But unlike forward contracts, the futures contracts are
standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. It is a standardized contract
with standard underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in
settlement) and a standard timing of such settlement.
A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction. More than 99% of futures transactions are offset this way. The
standardized items in a futures contract are:
• Quantity of the underlying
• Quality of the underlying
• The date and the month of delivery
• The units of price quotation and minimum price change
• Location of settlement
36
Distinction between futures and forwards contracts: Forward contracts are often
confused with futures contracts. The confusion is primarily because both serve essentially
the same economic functions of allocating risk in the presence of future price uncertainty.
However futures are a significant improvement over the forward contracts as they
eliminate counterparty risk and offer more liquidity. Table 5.3 lists the distinction
between the two.
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-month 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.
Contract size: The amount of asset that has to be delivered under one contract. Also
called as lot size.
Basis: In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for 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.
37
Marking-to-market: In the futures market, at the end of each trading day, the margin
account is adjusted to reflect the investor’s gain or loss depending upon the futures
closing price. This is called marking–to–market.
Maintenance margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the balance in
the margin account falls below the maintenance margin, the investor receives a margin
call and is expected to top up the margin account to the initial margin level before trading
commences on the next day.
Hedging
Speculation
Arbitrage
Asset allocation.
Options
Options are fundamentally different from forward and futures contracts. An option gives
the holder of the option the right to do something. The holder does not have to exercise
this right. In contrast, in a forward or futures contract, the two parties have committed
themselves to doing something. Whereas it costs nothing (except margin requirements) to
enter into a futures contract, the purchase of an option requires an upfront payment.
Options 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.
38
Stock options: Stock options are options on individual stocks. Options currently trade on
over 500 stocks in the United States. A contract gives the holder the right to buy or sell
shares at the specified price.
Buyer of an option: The buyer of an option is the one who by paying the option
premium buys the right but not the obligation to exercise his option on the seller/writer.
Writer of an option: The writer of a call/put option is the one who receives the option
premium and is thereby obliged to sell/buy the asset if the buyer wishes to exercise his
option. There are two basic types of options, call options and put options.
Call option: A call option gives the holder the right but not the obligation to buy an asset
by a certain date for a certain price.
Put option: A put option gives the holder the right but not the obligation to sell an asset
by a certain date for a certain price.
Option price: Option price is the price which the option buyer pays to the option seller.
It is also referred to as the option premium.
Expiration date: The date specified in the options contract is known as the expiration
date, the exercise date, the strike date or the maturity.
Strike price: The price specified in the options contract is known as the strike price or
the exercise price.
American options: American options are options that can be exercised at any time up to
the expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on the
expiration date itself. European options are easier to analyze than American options, and
properties of an American option are frequently deduced from those of its European
counterpart.
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 value of index stands at a level higher
than the strike price (i.e. spot price > strike price). If the value of index is much higher
than the strike price, the call is said to be deep ITM. On the other hand, a put option on
index is said to be ITM if the value of index is below the strike price.
39
At-the-money option: An at-the-money (ATM) option is an option that would lead to
zero cash flow if it were exercised immediately. An option on the index is at-the-money
when the value of 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 it was exercised immediately. A call option on the index is
said to be out-of-the-money when the value of 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. On the other hand, a put option on index is
OTM if the value of index is above the strike price.
Intrinsic value of an option: The option premium can be broken down into two
components–intrinsic value and time value. Intrinsic value of an option is the difference
between the market value of the underlying security/index in a traded option and the
strike price. The intrinsic value of a call is the amount when the option is ITM, if it is
ITM. If the call is OTM, its intrinsic value is zero.
Time value of an option: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An option that is
OTM or ATM has only time value. Usually, the maximum time value exists when the
option is ATM. The longer the time to expiration, the greater is an option’s time value, all
else equal. At expiration, an option should have no time value. While intrinsic value is
easy to calculate, time value is more difficult to calculate. Historically, this made it
difficult to value options prior to their expiration. Various option pricing methodologies
were proposed, but the problem wasn't solved until the emergence of Black-Scholes
theory in 1973.
Derivatives
40
in this case is used to protect the farmer against an unexpected decrease of the price in
wheat, thus reducing his exposure to market risk (link to market risk). On the other hand,
the buyer accepts the risk associated with the fixed price and he faces the possibility of
either the financial gain or loss, depending on the difference between the fixed price and
actual price at the time of harvest. Consequently, one may think of derivatives as a tool to
buy and sell risk. In finance a derivative security is a contract that specifies the rights and
obligations between the issuer of the security and the holder to receive or deliver future
cash flows (or exchange of other securities or assets) based on some future event.
Derivative can have a large number of properties, so that its value depends on many
factors. The terms and payments can be derived from the price of a security or
commodity, an event, or something else. Derivatives which are fully standardized like
futures and many options are generally traded through a securities exchange or future
exchange.
The term “Derivative indicates that it has no independent value, i.e.; its value is
entirely derived from the value of the underlying asset. The underlying asset can be
securities, commodities, bullion, currency, livestock or anything else. In other words,
Derivative means a forward, future, option or any other hybrid contract of predetermined
fixed duration, linked for the purpose of contract fulfillment to the value of a specified
real or financial asset or to Index securities.
The Securities Contracts Act (Regulation) Act 1956 defines derivative as follows;
Derivative includes;
• A contract which derives its values from the prices or Index of prices of
underlying securities.
41
• Derivatives are financial products.
TYPE OF DERIVATIVES
All derivatives can be divided into two broad classes as linear and nonlinear. The
distinction lies in how the derivative’s functions relates to the underlying assets value.
Within these two classes there are four general types of derivatives as follows;
Forwards
Futures
Swaps
Options
• Hedgers
• Speculators
• Arbitrageurs
Hedgers
Hedging is for protecting (risk-covering) against the adverse movement. Hedging
is a mechanism to reduce price risk inherent in open positions. Derivatives are widely
42
used for hedging. A Hedge can help lock in existing profits. Its purpose is to reduce the
volatility of a portfolio, by reducing the risk.
Speculators
Arbitrageurs
“Simultaneous purchase of securities in one market where the price thereof is low
and sale thereof in another market, where the price thereof is comparatively higher. These
8are done when the same securities are being quoted at different prices in the two
markets, with a view to make a profit and carried on with the conceived intention to
derive advantage from difference in price of securities prevailing in the two markets.”
Thus, arbitrage involves making risk less profit by simultaneously entering into
transaction in two or more markets.
BETA
Beta is a measure of systematic risk (it itself is not a systematic risk). It measures
the sensitivity of a scrip/portfolio vis-à-vis index movement. To interpret, scrip with beta
2 will give us a return of 20%, when index generates a return of 10%. Similarly if index
falls by 10% the scrip will fall by 20%. It means that the scrip is more volatile/risky.
43
Stocks having beta more than one are called aggressive and those having beta less
than one are called conservative stocks.
Beta of scrip is index specific, i.e. beta of the same scrip vis-à-vis sensex taking
last six months historical data into consideration, keeping all the other parameters
constant. Therefore to minimize the error, it is essential that the value of the beta can be
computed by taking into account longer period of time.
For this study, the beta values were obtained from the website
www.nseindia.com, and they have been computed using data for long period of time,
therefore error factor is minimized.
44
CHAPTER 4
ANALYSIS &
INTERPRETATION
45
Arbitrage
Note – Here we considered only the Highest Arbitrage Opportunity exist in the Month of
April
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in BSE - Buy in BSE)
= (2690-2788)+(2799-2650)
= -98+149
= Rs.51 (Profit)
Inference
46
The Share is price mismatch between the exchanges & 13 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 13th April is Rs.40 & was -11(Higher on
BSE) on the day of 15th April result in an arbitrage profit of Rs.51
Profit/loss
Difference
Reliance from Net
Date Inference
NSE BSE (NSE- Profit/Loss
price price BSE) NSE BSE
1-Apr-10 1078 1080.1 -2.05 0 0 0
5-Apr-10 1096.5 1100 -3.5 0 0 0
6-Apr-10 1128 1140 -12 0 0 0
7-Apr-10 1125 1128 -3 0 0 0
8-Apr-10 1133 1105.3 27.75 Sell in NSE & Buy in BSE 0 0 0
9-Apr-10 1108.2 1108 0.2 Buy in NSE & Sell in BSE 24.8 2.75 27.55
12-Apr-10 1145 1128 17 0 0 0
13-Apr-10 1128 1137 -9 0 0 0
15-Apr-10 1125 1130 -5 0 0 0
16-Apr-10 1086.1 1067.1 19.05 0 0 0
19-Apr-10 1079.8 1074.7 5.15 0 0 0
20-Apr-10 1069.9 1072 -2.15 0 0 0
21-Apr-10 1070 1074 -3.95 0 0 0
22-Apr-10 1050.5 1059.7 -9.2 0 0 0
23-Apr-10 1080 1088 -8 0 0 0
26-Apr-10 1080 1091.3 -11.3 0 0 0
27-Apr-10 1063 1049.6 13.4 0 0 0
28-Apr-10 1054 1045 8.95 0 0 0
29-Apr-10 1024 1030 -6 0 0 0
30-Apr-10 1040 1040 0 0 0 0
Note – Here we considered only the Highest Arbitrage Opportunity exist in the Month of
April
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in BSE - Buy in BSE)
= (1133-1108.2)+(1108-1105.3)
= 24.8+2.75
= Rs.27.55 (Profit)
47
Inference
The Share is price mismatch between the exchanges & 8th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 8th April is Rs.27.75 & was 0.2 on the day of
9th April result in an arbitrage profit of Rs 27.55
The Arbitrage opportunity of Bharti Airtel exist in the month of April 2010
Profit/loss
Difference Net
Bharti Airtel from
Date Inference Profit/
NSE BSE (NSE-BSE) Loss
price price NSE BSE
1-Apr-10 312.6 315 -2.4 0 0 0
5-Apr-10 307 302.15 4.85 0 0 0
6-Apr-10 317.5 319 -1.5 0 0 0
7-Apr-10 317 317 0 0 0 0
8-Apr-10 319 318 1 0 0 0
9-Apr-10 312 312 0 0 0 0
12-Apr-10 305.5 308.7 -3.2 0 0 0
13-Apr-10 307 309 -2 0 0 0
15-Apr-10 308 310 -2 0 0 0
16-Apr-10 303.5 300.2 3.3 0 0 0
19-Apr-10 343.7 300.65 43.05 Sell in NSE & Buy in BSE 0 0 0
20-Apr-10 309 308 1 Buy in NSE & Sell in BSE 34.7 7.35 42.05
21-Apr-10 306 305 1 0 0 0
22-Apr-10 305 304 1 0 0 0
23-Apr-10 303.4 303.4 0 0 0 0
26-Apr-10 300.1 300 0.1 0 0 0
27-Apr-10 298 297.5 0.5 0 0 0
28-Apr-10 297.95 295.15 2.8 0 0 0
29-Apr-10 294 294 0 0 0 0
30-Apr-10 299 298 1 0 0 0
Note – Here we considered only the Highest Arbitrage Opportunity exist in the Month of
April
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in BSE - Buy in BSE)
= (343.7-309)+(308-300.65)
= 34.7+7.35
= Rs.42.05 (Profit)
Inference
48
The Share is price mismatch between the exchanges & 19 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 19th April is Rs.43.05 & was Rs.1 on the day
of 20th April result in an arbitrage profit of Rs 42.05
Differenc Profit/loss
DLF e from Net
Date Inference Profit/
NSE BSE (NSE-
Loss
price price BSE) NSE BSE
1-Apr-10 311 311 0 0 0 0
5-Apr-10 312 316.6 -4.6 0 0 0
6-Apr-10 324 322.95 1.05 0 0 0
7-Apr-10 329 330 -1 0 0 0
8-Apr-10 345 332 13 Sell in NSE & Buy in BSE 0 0 0
9-Apr-10 335 334 1 Buy in NSE & Sell in BSE 10 2 12
12-Apr-10 334 338 -4 0 0 0
13-Apr-10 333.4 339.8 -6.4 0 0 0
15-Apr-10 335.25 337.25 -2 0 0 0
16-Apr-10 336.1 337 -0.9 0 0 0
19-Apr-10 325 325 0 0 0 0
20-Apr-10 317 317.7 -0.7 0 0 0
21-Apr-10 326 328 -2 0 0 0
22-Apr-10 328 325.55 2.45 0 0 0
23-Apr-10 325.35 327 -1.65 0 0 0
26-Apr-10 335 334 1 0 0 0
27-Apr-10 320 320 0 0 0 0
28-Apr-10 312 310.15 1.85 0 0 0
29-Apr-10 308.7 308 0.7 0 0 0
30-Apr-10 311 312 -1 0 0 0
Note – Here we considered only the Highest Arbitrage Opportunity exist in the Month of
April
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in BSE - Buy in BSE)
= (345-335)+(334-332)
= 10+2
= Rs.12 (Profit)
Inference
49
The Share is price mismatch between the exchanges & 8th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 8th April is Rs.13 & was Rs.1 on the day of
9th April result in an arbitrage profit of Rs12
Differe Profit/loss
SBI nce from Net
Date Inference Profit/
NSE BSE (NSE-
Loss
price price BSE) NSE BSE
1-Apr-10 2080 2085 -5 0 0 0
5-Apr-10 2115 2111 4 0 0 0
6-Apr-10 2143.9 2145 -1.1 0 0 0
7-Apr-10 2130.3 2135 -4.7 0 0 0
8-Apr-10 2105 2105 0 0 0 0
9-Apr-10 2100 2100 0 0 0 0
12-Apr-10 2115 2115 0 0 0 0
13-Apr-10 2097 2090.1 6.9 0 0 0
15-Apr-10 2096.65 2110 -13.35 0 0 0
16-Apr-10 2050 2051.05 -1.05 0 0 0
19-Apr-10 2039.95 2027 12.95 0 0 0
20-Apr-10 2042.4 2045 -2.6 0 0 0
21-Apr-10 2110 2102 8 0 0 0
22-Apr-10 2082.1 2100 -17.9 0 0 0
23-Apr-10 2230 2220 10 0 0 0
26-Apr-10 2264 2269 -5 0 0 0
27-Apr-10 2252 2252.1 -0.1 0 0 0
28-Apr-10 2204 2148.5 55.5 Sell in NSE & Buy in BSE 0 0 0
29-Apr-10 2240 2225 15 Buy in NSE & Sell in BSE -36 76.5 40.5
30-Apr-10 2280 2285 -5 0 0 0
Note – Here we considered only the Highest Arbitrage Opportunity exist in the Month of
April
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in BSE - Buy in BSE)
= (2204-2240)+(2225-2148.5)
= -36+76.5
= Rs.40.5 (Profit)
Inference
50
The Share is price mismatch between the exchanges & 28 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 28th April is Rs.55.5 & was Rs.15 on the day
of 29th April result in an arbitrage profit of Rs.40.5
The Arbitrage opportunity of Infosys between Spot & Futures exist in the month of April
2010
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in Future - Buy in Future)
= (2735-2708)+(2725.05-2740)
= 27+14.95
= Rs.41.95 (Profit)
Inference
51
The Share is price mismatch between the exchanges & 22 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 23th April is Rs.-32 & was Rs.9.95 on the day
of 23th April result in an arbitrage profit of Rs.41.95
The Arbitrage opportunity of Bharti Airtel between Spot & Futures exist in the
month of April 2010
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in Future - Buy in Future)
= (343.7-309)+(307.5-299.8)
= 34.7+7.7
= Rs.42.4 (Profit)
Inference
The Share is price mismatch between the exchanges & 19 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
52
difference on the exchanges (NSE-BSE) on 20th April is Rs.43.9 & was Rs.1.5 on the day
of 29th April result in an arbitrage profit of Rs.42.4
The Arbitrage opportunity of Reliance between Spot & Futures exist in the month
of April 2010
Differen
Profit/loss from Net
Reliance ce
Profi
Date (NSE- Inference Future
t/Los
NSE Future Future NSE Contrac
s
price price Price) t
1-Apr-10 1078 1089 -11 0 0 0
1096. 1105.
5-Apr-10 5 55 -9.05 0 0 0
6-Apr-10 1128 1131 -3 0 0 0
7-Apr-10 1125 1120 5 0 0 0
8-Apr-10 1133 1130 3 0 0 0
1108.
9-Apr-10 2 1112 -3.8 0 0 0
12-Apr- 1081. Sell in NSE &
10 1145 55 63.45 Buy in Future 0 0 0
13-Apr- 1124. Buy in NSE & 60.1
10 1128 7 3.3 Sell in Future 17 43.15 5
15-Apr- 1130.
10 1125 5 -5.5 0 0 0
16-Apr- 1086. 1090.
10 1 55 -4.45 0 0 0
19-Apr- 1079. 1072.
10 8 75 7.05 0 0 0
20-Apr- 1069.
10 85 1071 -1.15 0 0 0
21-Apr-
10 1070 1074 -4 0 0 0
22-Apr- 1050. 1054.
10 5 9 -4.4 0 0 0
23-Apr- 1080.
10 1080 4 -0.4 0 0 0
26-Apr-
10 1080 1068 12 0 0 0
27-Apr-
10 1063 1066 -3 0 0 0
28-Apr- 1053. 1052.
10 95 4 1.55 0 0 0
53
29-Apr-
10 1024 1026 -2 0 0 0
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in Future - Buy in Future)
= (1145-1128)+(1124.7-1081.55)
= 17+43.15
= Rs.60.15(Profit)
Inference
The Share is price mismatch between the exchanges & 12 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 13th April is Rs.63.45 & was Rs.3.3 on the
day of 13th April result in an arbitrage profit of Rs.60.15
The Arbitrage opportunity of SBI between Spot & Futures exist in the month of
April 2010
Differen Profit/loss
SBI ce from Net
Date (NSE- Inference Future Profit/
NSE Future Future NSE Contra Loss
price price Price) ct
1-Apr-10 2080 2092 -12 0 0 0
2124.
5-Apr-10 2115 9 -9.9 0 0 0
2143.
6-Apr-10 9 2146 -2.1 0 0 0
2130.
7-Apr-10 3 2139 -8.7 0 0 0
2106.
8-Apr-10 2105 2 -1.2 0 0 0
9-Apr-10 2100 2095 5 0 0 0
12-Apr- 2116.
10 2115 45 -1.45 0 0 0
13-Apr- 2087.
10 2097 1 9.9 0 0 0
15-Apr- 2096. 2113.
10 65 8 -17.15 0 0 0
16-Apr-
10 2050 2052 -2 0 0 0
19-Apr- 2039. 2032.
10 95 1 7.85 0 0 0
54
20-Apr- 2042.
10 4 2041 1.4 0 0 0
21-Apr- 2113.
10 2110 8 -3.8 0 0 0
22-Apr- 2082. 2181. Buy in NSE & Sell in
10 1 05 -98.95 Future 0 0 0
23-Apr- 2219. Sell in NSE & Buy in 109.2
10 2230 7 10.3 Future 147.9 -38.65 5
26-Apr- 2261.
10 2264 1 2.9 0 0 0
27-Apr-
10 2252 2247 5 0 0 0
28-Apr- 2194.
10 2204 95 9.05 0 0 0
29-Apr-
10 2240 2242 -2 0 0 0
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in Future - Buy in Future)
= (2230-2082.1)+(2181.05-2219.7)
= 147.9+-38.65
= Rs.109.25(Profit)
Inference
The Share is price mismatch between the exchanges & 22 th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 23th April is Rs.-98.5 & was Rs.10.3 on the
day of 23th April result in an arbitrage profit of Rs.109.25
The Arbitrage opportunity of DLF between Spot & Futures exist in the month of
April 2010
Differen Profit/loss
DLF ce from Net
Date Futur (NSE- Inference Future Profit/
NSE e Future NSE Contra Loss
price price Price) ct
1-Apr-10 311 311.5 -0.5 0 0 0
5-Apr-10 312 314.4 -2.4 0 0 0
6-Apr-10 324 324.8 -0.8 0 0 0
7-Apr-10 329 330 -1 0 0 0
Sell in NSE & Buy in
8-Apr-10 345 330.1 14.9 Future 0 0 0
55
Buy in NSE & Sell in
9-Apr-10 335 335 0 Future 10 4.9 14.9
12-Apr-
10 334 334.6 -0.6 0 0 0
13-Apr-
10 333.4 333.8 -0.4 0 0 0
15-Apr- 335.2
10 5 337.8 -2.55 0 0 0
16-Apr-
10 336.1 335.5 0.6 0 0 0
19-Apr-
10 325 323.5 1.5 0 0 0
20-Apr-
10 317 316.5 0.5 0 0 0
21-Apr-
10 326 329.1 -3.1 0 0 0
22-Apr-
10 328 329.2 -1.2 0 0 0
23-Apr- 325.3
10 5 326.9 -1.55 0 0 0
26-Apr-
10 335 335 0 0 0 0
27-Apr-
10 320 321 -1 0 0 0
28-Apr-
10 312 311.1 0.9 0 0 0
29-Apr-
10 308.7 309 -0.3 0 0 0
Arbitrage Profit = (Sell in NSE -Buy in NSE)+( Sell in Future - Buy in Future)
= (345-335)+(335-330.1)
= 10+4.9
= Rs.14.9(Profit)
Inference
The Share is price mismatch between the exchanges & 8th April show higher
Arbitrage Opportunity. The price in the NSE is higher than that of BSE, the price
difference on the exchanges (NSE-BSE) on 9th April is Rs.14.9 & was nil on the day of
9th April result in an arbitrage profit of Rs.14.9
56
The Arbitrage opportunity between ETF & Nifty Futures exist in the month of April
2010
NIFT Profit/loss
ETF from Net
Y ETF* Differen
Date Niftbe Inference Profit/
Futur 10 ce
es NSE ETF Loss
e
Sell in
NIFTY &
5286 Buy in
1-Apr-10 .1 515 5150 136.1 ETF 0 0 0
Buy in
5329 NIFTY &
5-Apr-10 .8 532.9 5329 0.8 Sell in ETF -43.7 179 135.3
6-Apr-10 5376 536 5360 16 0 0 0
7-Apr-10 5380 537 5370 10 0 0 0
8-Apr-10 5368 539.5 5395 -27 0 0 0
5307
9-Apr-10 .1 530 5300 7.1 0 0 0
5363
12-Apr-10 .8 538.5 5385 -21.2 0 0 0
5328
13-Apr-10 .8 535.5 5355 -26.25 0 0 0
5372
15-Apr-10 .3 532 5320 52.25 0 0 0
5264
16-Apr-10 .9 525.1 5251 13.9 0 0 0
19-Apr-10 5200 520 5200 0 0 0 0
20-Apr-10 5217 522 5220 -3 0 0 0
21-Apr-10 5245 524 5240 5 0 0 0
22-Apr-10 5220 523 5230 -10 0 0 0
23-Apr-10 5269 526.8 5268 1 0 0 0
5346
26-Apr-10 .8 534 5340 6.8 0 0 0
5304
27-Apr-10 .8 531 5310 -5.2 0 0 0
5252
28-Apr-10 .3 524.5 5245 7.25 0 0 0
5233
29-Apr-10 .3 519 5190 43.3 0 0 0
Inference
57
The Nifty price mismatch between the Futures Index & ETF on 8 th April show
higher Arbitrage Opportunity. The price in the NSE is higher than that of ETF, the price
difference on the exchanges (NSE-ETF) on 9th April is Rs.0.8 & was nil on the day of 9th
April result in an arbitrage profit of Rs.135.3
Hedging
58
The Companies has been selected on the basis of market capitalization choosen
randomnly from the various sectors
59
Price of Shares as on 3rd May 2010
60
INFOSYSTCH 37 2694.9 99711.3 0.69 68800.8
HINDUNILVR 428 233.75 100045 0.38 38017.1
LT 63 1591.9 100290 1.25 125362.1
TATASTEEL 165 607.05 100163 1.37 137223.7
RELIANCE 98 1023.75 100328 1.25 125409.4
CIPLA 296 337.65 99944.4 0.48 47973.3
NTPC 488 204.95 100016 0.59 59009.2
BHARTIARTL 337 297 100089 0.92 92081.9
2073 1001631 919081.2
= 919081.2/1001631
= 0.92
Company
61
12-May-10 802.65 2324.2 2681.7 238.5 1563.9 584.45
13-May-10 830.85 2317.75 2706.15 238.2 1571 575.1
1529.3
14-May-10 816.25 2224.25 2651.9 233.9 5 547.95
17-May-10 789.2 2250.75 2616.35 240.05 1606.9 536.35
1661.0
18-May-10 772.35 2280 2629.2 240.05 5 530.3
19-May-10 714.9 2214.15 2602.85 233.35 1633.6 512.5
20-May-10 711.9 2267.5 2600.75 236.95 1642.1 508.15
1608.5
21-May-10 709.85 2271.2 2581.75 230.7 5 509.25
24-May-10 706.95 2231.2 2600.4 231.7 1631.4 501.05
25-May-10 673.45 2155.1 2533.4 230.55 1558.5 476.65
1607.7
26-May-10 709.5 2173.6 2621.05 231.55 5 484.45
1628.8
27-May-10 741.75 2219.4 2643.35 233 5 492.35
Company
Total Portfolio
RELIANCE CIPLA NTPC BHARTIARTL
Date Amt
Profit/Loss
62
13-May-10 1071.8 314.65 207.75 258.4 981767.7 1123.65
Value of Portfolio
63
The Value to be Hedged = Portfolio Beta Amount
Nifty Future Value
= 887867
5222
= 170 Nifty * Nifty Value on 3rd May
64
The impact of Hedging of the portfolio
65
Company ∑x ∑y ∑xy ∑x2 (∑x)2 Beta (β)
TATAMOTORS 45.9 142.73 939.63 847.56 2106.5 1.22
SBIN 45.9 67.43 847.56 847.56 2106.5 1.16
INFOSYSTCH 45.9 65.14 591.2 847.56 2106.5 0.69
HINDUNILVR 45.9 6.43 321.38 847.56 2106.5 0.38
LT 45.9 69.78 1060.03 847.56 2106.5 1.27
TATASTEEL 45.9 111.03 1167.74 847.56 2106.5 1.4
RELIANCE 45.9 -27.24 1046.9 847.56 2106.5 1.23
CIPLA 45.9 40.81 411.34 847.56 2106.5 0.51
NTPC 45.9 12.35 499.39 847.56 2106.5 0.61
BHARTIARTL 45.9 -63.1 759.23 847.56 2106.5 0.91
66
Company Share Price Weightage No. of Shares Amount
TATAMOTORS 777.65 0.1 128.6 100000
SBIN 2102.6 0.1 47.6 100000
INFOSYSTCH 2670.45 0.1 37.4 100000
HINDUNILVR 230.4 0.1 434.0 100000
LT 1650.7 0.1 60.6 100000
TATASTEEL 652.2 0.1 153.3 100000
RELIANCE 1092.05 0.1 91.6 100000
CIPLA 339 0.1 295.0 100000
NTPC 207.7 0.1 481.5 100000
BHARTIARTL 302 0.1 331.1 100000
1 1000000
The no. of shares will be rounded excluding the decimal place
= 939700.1/1000861
= .94
67
Company
68
Company
Date Portfolio
Total
RELIANCE CIPLA NTPC BHARTIARTL
Amt
Profit/Loss
69
Value of Portfolio
= 902156
5306
= 170 Nifty * Nifty Value on 1st April
70
The impact of Hedging of the portfolio
71
Here the investor can makes profit on his portfolio as well as in the hedged amount with a
total Profit of Rs.11998
The Beta Value of Shares on the Month of March
Beta
Company ∑x ∑y ∑xy ∑x2 (∑x)2 (β)
TATAMOTORS 45.9 142.73 939.63 847.56 2106.5 1.25
SBIN 45.9 67.43 847.56 847.56 2106.5 1.2
INFOSYSTCH 45.9 65.14 591.2 847.56 2106.5 0.69
HINDUNILVR 45.9 6.43 321.38 847.56 2106.5 0.4
1060.0
LT 45.9 69.78 3 847.56 2106.5 1.27
1167.7
TATASTEEL 45.9 111.03 4 847.56 2106.5 1.47
RELIANCE 45.9 -27.24 1046.9 847.56 2106.5 1.24
CIPLA 45.9 40.81 411.34 847.56 2106.5 0.48
NTPC 45.9 12.35 499.39 847.56 2106.5 0.58
BHARTIARTL 45.9 -63.1 759.23 847.56 2106.5 0.9
72
Price of Shares as on 2nd March 2010
= 947239.5/999608
= 0.94
73
Portfolio Value & for the month of March
Company
74
Company
Date
Portfolio
RELIANCE CIPLA NTPC BHARTIARTL Total Amt
Profit/Loss
75
25-Mar-10 1091.45 348.8 200.65 314.4 1036490 6007.05
Value of Portfolio
78