Chapter 1

Introduction:

Introduction of the derivatives was anticipated by the market players since long.
Contribution of derivatives is going to be defining the development of the capital market in
India, at a time, when benefit and convenience continues to be the most favourable arguments
in favour of the derivatives. How far these complicated products would be understood and
accepted by the common investor is the question that remains.

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 pre determined
fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or
financial asset or to an index of securities.

With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included
in the definition of Securities. The term Derivative has been defined in Securities Contracts
(Regulations) Act, as:-
A Derivative includes: -
 a security derived from a debt instrument, share, loan, whether secured or unsecured,
risk instrument or contract for differences or any other form of security;
 a contract which derives its value from the prices, or index of prices, of underlying
securities;

Emergence:

Early forward contracts in the US addressed merchants' concerns about ensuring that
there were buyers and sellers for commodities. However 'credit risk" remained a serious
problem. To deal with this problem, a group of Chicago businessmen formed the Chicago
Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a
centralized location known in advance for buyers and sellers to negotiate forward contracts.

1
 In 1865, the CBOT went one step further and listed the first 'exchange traded"
derivatives contract in the US, these contracts were called 'futures contracts". In 1919,
Chicago Butter and Egg Board, a spin-off of CBOT, was reorganized to allow futures trading.
Its name was changed to Chicago Mercantile Exchange (CME). The CBOT and the CME
remain the two largest organized futures exchanges, indeed the two largest "financial"
exchanges of any kind in the world today.

The first stock index futures contract was traded at Kansas City Board of Trade.
Currently the most popular stock index futures contract in the world is based on S&P 500
index, traded on Chicago Mercantile Exchange. During the mid eighties, financial futures
became the most active derivative instruments generating volumes many times more than the
commodity futures. Index futures, futures on T-bills and Euro-Dollar futures are the three
most popular futures contracts traded today. Other popular international exchanges that trade
derivatives are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan,
MATIF in France, Murex etc.

Derivative products initially emerged as hedging devices against fluctuations in

commodity prices, and commodity-linked derivatives remained the sole form of such
products for almost three hundred years. Financial derivatives came into spotlight in the post-
1970 period due to growing instability in the financial markets. However, since their
emergence, these products have become very popular and by 1990s, they accounted for about
two-thirds of total transactions in derivative products. In recent years, the market for financial
derivatives has grown tremendously in terms of variety of instruments available, their
complexity and also turnover.

In the class of equity derivatives the world over, futures and options on stock indices
have gained more popularity than on individual stocks, especially among institutional
investors, who are major users of index-linked derivatives. Even small investors find these
useful due to high correlation of the popular indexes with various portfolios and ease of use.

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FINANCIAL DERIVATIVES: RECENT TRENDS
Changing interest rate and exchange rate expectations, new highs reached by equity
markets and the sharp reversal of leveraged positions in the latter part of 1998 stimulated
activity in derivatives markets in 1998. Exchange traded business soared in the third quarter
of 1998 as investors withdrew from risky assets and shifted their exposure towards highly
rated and liquid government securities.

Competition between exchanges remained intense, particularly in Europe, where the

imminence of the euro and the inexorable advance of automated exchanges challenged the
dominance of established marketplaces. Moreover, exchanges continued to face competition
from the rapidly growing over the counter (OTC) markets, forcing them to offer a wider
range of services to make up for the loss of their franchises. The sharp increase in OTC
outstanding positions in the second half of 1998 showed that the need for a massive reversal
of exposures following the Russian moratorium more than offset the dampening impact of
increased concerns about liquidity and counter party risks. Nevertheless, the turbulence and
related losses revealed the weaknesses of existing risk management systems in periods of
extreme volatility and vanishing liquidity, prompting market participants to reconsider their
risk models and internal control procedures.

FACTORS DRIVING THE GROWTH OF DERIVATIVES

Over the last three decades, the derivatives market has seen a phenomenal growth. A
large variety of derivative contracts have been launched at exchanges across the world. Some
of the factors driving the growth of financial derivatives are:
• Increased volatility in asset prices in financial markets,
• Increased integration of national financial markets with the international markets,
• Marked improvement in communication facilities and sharp decline in their costs,
• Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies, and
• Innovations in the derivatives markets, which optimally combine the risks and returns
over a large number of financial assets leading to higher returns, reduced risk as well
as transactions costs as compared to individual financial assets.

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ECONOMIC FUNCTION OF THE DERIVATIVE MARKET
In spite of the fear and criticism with which the derivative markets are commonly
looked at, these markets perform a number of economic functions.
 Prices in an organized derivatives market reflect the perception of market participants
about the future and lead the prices of underlying to the perceived future level. The
prices of derivatives converge with the prices of the underlying at the expiration of the
derivative contract. Thus derivatives help in discovery of future as well as current
prices.
 The derivatives market helps to transfer risks from those who have them but may not
like them to those who have an appetite for them.
 Derivatives, due to their inherent nature, are linked to the underlying cash markets.
With the introduction of derivatives, the underlying market witnessed higher trading
volumes because of participation by more players who would not otherwise
participate for lack of an arrangement to transfer risk.
 Speculative trades shift to a more controlled environment of derivatives market. In the
absence of an organized derivatives market, speculators trade in the underlying cash
markets. Margining, monitoring and surveillance of the activities of various
participants become extremely difficult in these kinds of mixed markets.
 An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. The derivatives have a history of attracting
many bright, creative, well-educated people with an entrepreneurial attitude. They
often energize others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.

EXCHANGE-TRADED vs. OTC DERIVATIVES MARKETS

Derivatives have probably been around for as long as people have been trading with
one another. Forward contracting dates back at least to the 12th century, and May well have
been around before then. Merchants entered into contracts with one another for future
delivery of specified amount of commodities at specified price. A primary motivation for pre-
arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen
the possibility that large swings would inhibit marketing the commodity after a harvest. As
the word suggests, derivatives that trade on an exchange are called exchange traded
derivatives, whereas privately negotiated derivative contracts are called OTC contracts.

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 The OTC derivatives markets have witnessed rather sharp growth over the last few
years, which have accompanied the modernization of commercial and investment banking
and globalisation of financial activities. The recent developments in information technology
have contributed to a great extent to these developments. While both exchange-traded and
OTC derivative contracts offer many benefits, the former have rigid structures compared to
the latter. It has been widely discussed that the highly leveraged institutions and their OTC
derivative positions were the main cause of turbulence in financial markets in 1998. These
episodes of turbulence revealed the risks posed to market stability originating in features of
OTC derivative instruments and markets.
The OTC derivatives markets have the following features compared to exchange
traded derivatives:
 The management of counter-party (credit) risk is decentralized and located within
individual institutions,
 There are no formal centralized limits on individual positions, leverage, or margining,
 There are no formal rules for risk and burden-sharing,
 There are no formal rules or mechanisms for ensuring market stability and integrity,
and for safeguarding the collective interests of market participants, and
 The OTC contracts are generally not regulated by a regulatory authority and the
exchange's self-regulatory organization, although they are affected indirectly by
national legal systems, banking supervision and market surveillance.

Some of the features of OTC derivatives markets embody risks to financial market
stability. The following features of OTC derivatives markets can give rise to instability in
institutions, markets, and the international financial system:
(i) The dynamic nature of gross credit exposures
(ii) Information asymmetries;
(iii) The effects of OTC derivative activities on available aggregate credit;
(iv) The high concentration of OTC derivative activities in major institutions; and
(v) The central role of OTC derivatives markets in the global financial system. Instability
arises

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 When shocks, such as counter-party credit events and sharp movements in asset prices
that underlie derivative contracts occur, which significantly alter the perceptions of current
and potential future credit exposures. When asset prices change rapidly, the size and
configuration of counter-party exposures can become unsustainably large and provoke a rapid
unwinding of positions. There has been some progress in addressing these risks and
perceptions. However, the progress has been limited in implementing reforms in risk
management, including counter-party, liquidity and operational risks, and OTC derivatives
markets continue to pose a threat to international financial stability. The problem is more
acute as heavy reliance on OTC derivatives creates the possibility of systemic financial
events, which fall outside the more formal clearing house structures. Moreover, those who
provide OTC derivative products, hedge their risks through the use of exchange traded
derivatives. In view of the inherent risks associated with OTC derivatives, and their
dependence on exchange traded derivatives, Indian law considers them illegal.

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 Chapter 2

Company Profile

History:

Karvy was started by a group of five chartered accountants in 1979. The partners
decided to offer, other than the audit services, value added services like corporate advisory
services to their clients. The first firm in the group, Karvy Consultants Limited was
incorporated on 23rd July, 1983 at Hyderabad, India. Karvy ranks among the top player in
almost all the fields it operates. Karvy Computershare Limited is India’s largest Registrar and
Transfer Agent with a client base of nearly 500 blue chip corporate, managing over 2 crore
accounts. Karvy Stock Brokers Limited, member of National Stock Exchange of India and
the Bombay Stock Exchange, ranks among the top 5 stock brokers in India.

With over 6, 00,000 active accounts, it ranks among the top 5 Depositary Participant
in India, registered with NSDL and CDSL. Karvy Comtrade, Member of NCDEX and MCX
ranks among the top 3 commodity brokers in the country. Karvy Insurance Brokers is
registered as a Broker with IRDA and ranks among the top 5 insurance agent in the country.
Registered with AMFI as a corporate Agent, Karvy is also among the top Mutual Fund
mobilizer with over Rs. 5,000 crores under management. Karvy Realty Services, which
started in 2006, has quickly established itself as a broker who adds value, in the realty sector.
Karvy Global offers niche off shoring services to clients in the US.

Karvy has 575 offices over 375 locations across India and overseas at Dubai and New
York. Over 9,000 highly qualified people staff Karvy. Karvy has always believed in adding
value to services it offers to clients. A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs.

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With the information overload today, Karvy’s team of analysts help investors make the right
calls, be it equities, mf, insurance. On a typical working day Karvy:

 Has more than 25,000 investors visiting 575 offices

 Publishes / broadcasts at least 50 buy / sell calls
 Attends to 10,000+ telephone calls
 Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises,
allotment / refund advises
 Executes 150,000+ trades on NSE / BSE
 Executes 50,000 debit / credit in the depositary accounts
 Advises 3,000+ clients on the investments in mutual funds

Karvy group companies:

KARVY CONSULTANTS LTD. Deals with depository participant services and it

enabled services.

KARVY STOCK BROKING LIMITED creates opportunities for the customer by

opening up investment through valuable research based advisory services and providing
investment and brokerage services in Indian stock market.

KARVY COMTRADE LIMITED provides investment, advisory and brokerage

services in Indian commodities Markets.

KARVY INSURANCE BROKING LIMITED provides both life and non-life

insurance products to retail individuals, high net-worth clients and corporate.

KARVY INVESTOR SERVICE LIMITED, SEBI registered Merchant Banker,

leading Investment Banking entity in the country and corporate Finance.

KARVY COMPUTERSHARE PRIVATE LIMITED operates in five continents,

providing services and solutions to listed companies, investors, employees, exchange and
other financial institutions and also registrar for IPOs.

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 KARVY- THE FINAPOLIS is a big distributor of equity and financial products and
provides planning and advisory services to the mass affluent.

KARVY GLOBAL SERVICES LIMITED deals with the specialist Business

Process Outsourcing.

KARVY REALTY & SERVICES (INDIA) LIMITED is engaged in business of

real estate and property services offering value added property services and offers individuals
ad establishments a myriad of options across investments, financing and advisory services in
the realty sector,

Inspite of all this Karvy has its Research Center in Hyderabad and also a member of
Hyderabad stock exchange. It is also a member of National Stock Exchange and Bombay
stock Exchange.

Achievements:

• Largest independent distributor for financial products

• Amongst the top 5 stock brokers in India
• Largest network of branches and business associates
• Amongst top 10 investment bankers
• ISO 9002 certified operation by DNV
• India’s No.1 Registrar and Transfer Agents
• Ranks among top 5 depository participant in India.

Mission:

To be a leading, preferred services provider to our customer, and to achieve this

leadership position by building an innovative, enterprising and technology driven
organization which will set the highest standards of service and business ethics.

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Area of Operation:

Stock Broking Services:

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high
success rate as a wealth management and wealth accumulation option. The difference
between unpredictability and a safety anchor in the market is provided by in-depth
knowledge of market functioning and changing trends, planning with foresight and choosing
one’s options with care.

It offers services that are beyond just a medium for buying and selling stocks and
shares. Instead provide services which are multi dimensional and multi-focused in their
scope. There are several advantages in utilizing this Stock Broking service, which are the
reasons why it is one of the best in the country.

Karvy offer trading on a vast platform; National Stock Exchange and Bombay Stock
Exchange. More importantly, they make trading safe to the maximum possible extent, by
accounting for several risk factors and planning accordingly. We are assisted in this task by
our in-depth research, constant feedback and sound advisory facilities. Our highly skilled
research team, comprising of technical analysts as well as fundamental specialists, secure
result-oriented information on market trends, market analysis and market predictions.

Depository Participants

The onset of the technology revolution in financial services Industry saw the
emergence of Karvy as an electronic custodian registered with National Securities
Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Karvy
set standards enabling further comfort to the investor by promoting paperless trading across
the country and emerged as the top 3 Depository Participants in the country in terms of
customer serviced.

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 Offering a wide trading platform with a dual membership at both NSDL and CDSL,
we are a powerful medium for trading and settlement of dematerialized shares. We have
established live DPMs, Internet access to accounts and an easier transaction process in order
to offer more convenience to individual and corporate investors.

A team of professional and the latest technological expertise allocated exclusively to

our demat division including technological enhancements like SPEED-e; make our response
time quick and our delivery impeccable. A wide national network makes our efficiencies
accessible to all.

Distribution of Financial Product

The paradigm shift from pure selling to knowledge based selling drives the business
today. With our wide portfolio offerings, we occupy all segments in the retail financial
services industry.

A 1600 team of highly qualified and dedicated professionals drawn from the best of
academic and professional backgrounds are committed to maintaining high levels of client
service delivery. This has propelled us to a position among the top distributors for equity and
debt issues with an estimated market share of 15% in terms of applications mobilized, besides
being established as the leading procurer in all public issues.

To further tap the immense growth potential in the capital markets we enhanced the
scope of our retail brand, Karvy – the Finapolis, thereby providing planning and advisory
services to the mass affluent. Here we understand the customer needs and lifestyle in the
context of present earnings and provide adequate advisory services that will necessarily help
in creating wealth. Judicious planning that is customized to meet the future needs of the
customer deliver a service that is exemplary. The market-savvy and the ignorant investors,
both find this service very satisfactory. The edge that we have over competition is our
portfolio of offerings and our professional expertise. The investment planning for each
customer is done with an unbiased attitude so that the service is truly customized.

Our monthly magazine, Finapolis, provides up-dated market information on market

trends, investment options, opinions etc. Thus empowering the investor to base every

11
financial move on rational thought and prudent analysis and embark on the path to wealth
creation.

Advisory Services

Under their retail brand ‘Karvy – the Finapolis', we deliver advisory services to a
cross-section of customers. The service is backed by a team of dedicated and expert
professionals with varied experience and background in handling investment portfolios. They
are continually engaged in designing the right investment portfolio for each customer
according to individual needs and budget considerations with a comprehensive support
system that focuses on trading customers' portfolios and providing valuable inputs,
monitoring and managing the portfolio through varied technological initiatives. This is made
possible by the expertise we have gained in the business over the years. Another venture
towards being investor-friendly is the circulation of a monthly magazine called ‘Karvy - the
Finapolis'. Covering the latest of market news, trends, investment schemes and research-
based opinions from experts in various financial fields

Private Client Group

This specialized division was set up to cater to the high net worth individuals and
institutional clients keeping in mind that they require a different kind of financial planning
and management that will augment not just existing finances but their life-style as well. Here
we follow a hard-nosed business approach with the soft touch of dedicated customer care and
personalized attention.

For this purpose they offer a comprehensive and personalized service that
encompasses planning and protection of finances, planning of business needs and retirement
needs and a host of other services, all provided on a one-to-one basis.

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 Chapter 3

DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are forwards,
futures, options and swaps. We take a brief look at various derivatives contracts that have
come to be used.

Derivatives

Forwar Futures Option Swap

ds s

Forwards:
A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at today's pre-agreed price. A forward contract
obligates one counter party to buy and the other to sell a specific underlying asset at a
specific price, amount and date in the future.

Futures:
A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense that the former are standardized exchange-traded contracts. This
contract can be bought or sold in only organised futures market.

Options:

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 An option is a contract written by a seller that conveys to the buyer the right — but
not the obligation — to buy (in the case of a call option) or to sell (in the case of a put option)
a particular asset, at a particular price (Strike price / Exercise price) in future.

In return for granting the option, the seller collects a payment (the premium) from the
buyer. Options are of two types
Call Option: Calls give the buyer the right but not the obligation to buy a given
quantity of the underlying asset, at a given price on or before a given future date.
Put option: Puts give the buyer the right, but not the obligation to sell a given quantity
of the underlying asset at a given price on or before a given date.

Warrants:
Options generally have lives of upto one year; the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.

LEAPS:
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of upto three years.

Baskets:
Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average of a basket of assets. Equity index options are a form of basket
options.

Swaps:
Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of forward
contracts. The two commonly used swaps are:
· Interest rate swaps: These entail swapping only the interest related cash flows
between the parties in the same currency.

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 · Currency swaps: These entail swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currency than those in the
opposite direction.

Swaptions:
Swaptions are options to buy or sell a swap that will become operative at the expiry
of the options. Thus a swaption is an option on a forward swap. Rather than have calls and
puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption
is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and
receive floating.

Options:
An option is a contract whereby one party (the holder or buyer) has the right, but not
the obligation, to exercise the contract (the option) on or before a future date (the exercise
date or expiry). The other party (the writer or seller) has the obligation to honour the
specified feature of the contract. Since the option gives the buyer a right and the seller an
obligation, the buyer has received something of value. The amount the buyer pays the seller
for the option is called the option premium. Because this is a security whose value is
determined by an underlying asset, it is classified as a derivative. The idea behind an option is
present in everyday situations.

Participants in the Options Market

There are four types of participants in options markets depending on the position they
take: They are:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
People who buy options are called holders and those who sell options are called writers:
furthermore, buyers are said to have long positions, and sellers are said to have short
positions.

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 -Call holders and put holders (buyers) are not obligated to buy or sell. They have the
choice to exercise their rights if they choose.
-Call writers and put writers (sellers), however, are obligated to buy or sell. This
means that a seller may be required to make good on a promise to buy or sell.

OPTION TERMINOLOGY
Index options:
These options have the index as the underlying. Some options are European while
others are American. Like index futures contracts, index options contracts are also cash
settled.

Stock options:
Stock options are options on individual stock. Options currently trade on over 500
stocks in the United States. A contract gives the holder the right to buy or sell shares at the
specified price.

Buyer of an option:
The buyer of an option is the one who by paying the option premium buys the right
but not the obligation to exercise his option on the seller/writer.

Writer of an option:
The writer of a call/put option is the one who receives the option premium and is
thereby obliged to sell/buy the asset if the buyer exercises on him. 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/premium:

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

European options:
European options are options that can be exercised only on the expiration date itself.
European options are easier to analyze than American options, and properties of an American
option are frequently deduced from those of its European counterpart.

In-the-money option:
An in-the-money (ITM) option is an option that would lead to a positive cash flow to
the holder if it were exercised immediately. A call option on the index is said to be in-the-
money when the current index stands at a level higher than the strike price (i.e. spot price >
strike price). If the index is much higher than the strike price, the call is said to be deep ITM.
In the case of a put, the put is ITM if the index is below the strike price.

At-the-money option:
An at-the-money (ATM) option is an option that would lead to zero cash flow if it
were exercised immediately. An option on the index is at-the-money when the current index
equals the strike price (i.e. spot price = strike price).

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Out-of-the-money option:
An out-of-the-money (OTM) option is an option that would lead to a negative cash
flow if it were exercised immediately. A call option on the index is out-of-the-money when
the current index stands at a level which is less than the strike price (i.e. spot price < strike
price). If the index is much lower than the strike price, the call is said to be deep OTM. In the
case of a put, the put is OTM if the index is above the strike price.

Intrinsic value of an option:

The option premium can be broken down into two components - intrinsic value and
time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the
call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic value of a call is
Max [0, (St — K)] which means the intrinsic value of a call is the greater of 0 or (St — K).
Similarly, the intrinsic value of a put is Max [0, K — St], i.e. the greater of 0 or (K — St). K
is the strike price and St is the spot price.

Time value of an option:

The time value of an option is the difference between its premium and its intrinsic
value. Both calls and puts have time value. An option that is OTM or ATM has only time
value. Usually, the maximum time value exists when the option is ATM. The longer the time
to expiration, the greater is an option's time value, all else equal. At expiration, an option
should have no time value.

Reason for using Option

Two main reasons why an investor would use options are:

a. Speculation
Speculation is the betting on the movement of a security. The advantage of options is
that one isn’t limited to making a profit only when the market goes up. Because of the
versatility of options, one can also make money when the market goes down or even
sideways Speculation is the territory in which the big money is made - and lost. The use of
options for making big money or less is the reason why they have the reputation of being
risky. This is because when one buys an option; one has to be correct in determining not only
the direction of the stock's movement, but also the magnitude and the timing of this

18
movement. To succeed, one must correctly predict whether a stock will go up or down, and
has to be right about how much the price will change as well as the time frame it will take for
all this to happen commissions must also be taken into account.

b. Hedging
The other function of options is hedging. Think of this as an insurance policy. Just as
one insures one’s house or car, options can be used to insure the investments against a
downturn. By using options, one would be able to restrict one’s downslide while enjoying the
full upside in a cost-effective way.

Advantages of options trading

a. Risk management:
Put options allow investors holding shares to hedge against a possible fall in their
value. This can be considered similar to taking out insurance against a fall in the share price.

b. Time to decide:
By taking a call option the purchase price for the shares is locked in which gives the
call option holder until the Expiry Day to decide whether or not to exercise the option and
buy the shares. Likewise the taker of a put option has time to decide whether or not to sell the
shares.

c. Speculation:
The ease of trading in and out of an option position makes it possible to trade options
with no intention of ever exercising them. If an investor expects the market to rise, they may
decide to buy call options. If expecting a fall, they may decide to buy put options. Either way
the holder can sell the option prior to expiry to take a profit or limit a loss. Trading options
has a lower cost than shares, as there is no stamp duty payable unless and until options are
exercised.

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d. Leverage:
Leverage provides the potential to make a higher return from a smaller initial outlay
than investing directly. However, leverage usually involves more risks than a direct
investment in the underlying shares. Trading in options can allow investors to benefit from a
change in the price of the share without having to pay the full price of the share.

e. Income generation:
Shareholders can earn extra income over and above dividends by writing call options
against their shares. By writing an option they receive the option premium upfront. While
they get to keep the option premium, there is a possibility that they could be exercised against
and have to deliver their shares to the taker at the exercise price.

f. Strategies:
By combining different options, investors can create a wide range of potential profit
scenarios.

Limitation of option:
 Regular use of option involves high premium costs. The buyer of an option must be
satisfied that these costs justify the risk that is being hedged.
 Only a limited number of currencies are available in traded options. The trading
centres are also limited in number.

Illustration:
In order to understand the working of options, an assumed firm by the name Justus
Company, is taken Let's say that on May 1, the stock price of Justus Co. was Rs.75 and the
premium (cost) was Rs.3.15 for a July 78 Call, which indicated that the expiration was the
third Friday of July and the strike price was Rs.78. The total price of the contract was Rs.3.15
x 100 = Rs.315. In reality, you'd also have to take commissions into account, but we'll ignore
them for this example.

Remember, a stock option contract is the option to buy 100 shares; that's why you
must multiply the contract by 100 to get the total price. The strike price of Rs. 78 means that

20
the stock price must rise above Rs.78 before the call option is worth anything; furthermore,
because the contract is Rs.3.70 per share, the break-even price would beRs.81. When the
stock price is Rs.67, it's less than the Rs.70 strike price, so the option is worthless. But don't
forget that you've paid Rs.315 for the option, so you are currently down by this amount.
Three weeks later the stock price is Rs.84. The options contract has increased along with the
stock price and is now worth Rs.6 x 100 = Rs.600. Subtract what you paid for the contract,
and your profit is (Rs.3) x 100 = Rs.300.
You almost doubled the money in just three weeks! You could sell your options,
which are called "closing your position," and take your profits - unless, of course, you think
the stock price will continue to rise. For the sake of this example, let's say we let it ride. By
the expiration date, the price drops to Rs.60. Because this is less than our Rs.78 strike price
and there is no time left, the option contract is worthless. We are now down to the original
investment of Rs.300. Putting it in the form of a table: here is what happened to our option
investment:

The price swing for the length of this contract from high to low was Rs.600, which
would have given us over double our original investment.

Types of Options
There are two main types of options:

a. American options can be exercised at any time between the date of purchase and the
expiration date.

b. European options can only be exercised at the end of their lives.

21
c. Long-Term Options are options with holding times of one, two or multiple years,
which may be more appealing for long-term investors, which are called long-term equity
anticipation securities (LEAPS). By providing opportunities to control and manage risk or
even to speculate, LEAPS are virtually identical to regular options. LEAPS, however, provide
these opportunities for much longer periods of time. Although they are not available on all
stocks, LEAPS are available on most widely held issues.

d. Real option is a choice that an investor has when investing in the real economy - in the
production of goods or services, rather than in financial contracts – which may be something
as simple as the opportunity to expand production, or to change production inputs. They are
an increasingly influential tool in corporate finance with typically difficult or impossible to
trade

e. Traded options (also called "Exchange-Traded Options" or "Listed Options") are

Exchange traded derivatives which have: standardized contracts; quick systematic pricing;
and are settled through a clearing house (ensuring fulfillment.) These include: stock options;
bond options; interest rate options; and swaption.

f. Vanilla options are 'simple', well understood and traded options, whereas an exotic
option is more complex, or less easily understood and non-standard in nature. Asian options,
look back options, barrier options are considered to be exotic, especially if the underlying
instrument is more complex than simple equity or debt.

g. Employee stock options are issued by a company to its employees as compensation.

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 Chapter 4

Futures:
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. If it is an American-style option, it
can be exercised on or before the expiration date; a European option can only be exercised at
expiration. Thus, a Futures contract is more like a European option.

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.

23
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

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

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.

24
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.

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.

Forward:
Forward A forward contract is an agreement to buy or sell an asset on a specified date
for a specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified price. The
other party assumes a short position and agrees to sell the asset on the same date for the same
price. Other contract details like delivery date, price and quantity are negotiated bilaterally by
the parties to the contract. The forward contracts are normally traded outside the exchanges.

The salient features of forward contracts are:

• They are bilateral contracts and hence exposed to counter-party risk.
• Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
• The contract price is generally not available in public domain.
• On the expiration date, the contract has to be settled by delivery of the asset.
• If the party wishes to reverse the contract, it has to compulsorily go to the same
counter- party, which often results in high prices being charged.

25
 However forward contracts in certain markets have become very standardized, as in
the case of foreign exchange, thereby reducing transaction costs and increasing transactions
volume. This process of standardization reaches its limit in the organized futures market.

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and agrees to buy
the underlying asset on a certain specified future date for a certain specified price e. The other
party assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated bilaterally by the
parties to the contract. The forward contracts are normally traded outside the exchanges.

The salient features of forward contracts are:

• They are bilateral contracts and hence exposed to counter-party risk.
• Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
• The contract price is generally not available in public domain.
• On the expiration date, the contract has to be settled by delivery of the asset.
• If the party wishes to reverse the contract, it has to compulsorily go to the same
counter-party, which often results in high prices being charged.

However forward contracts in certain markets have become very standardized, as in

the case of foreign exchange, thereby reducing transaction costs and increasing transactions
volume. This process of standardization reaches its limit in the organized futures market.
Forward contracts are very useful in hedging and speculation. The classic hedging application
would be that of an exporter who expects to receive payment in dollars three months later. He
is exposed to the risk of exchange rate fluctuations. By using the currency forward market to
sell dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an
importer who is required to make a payment in dollars two months hence can reduce his
exposure to exchange rate fluctuations by buying dollars forward.

26
 If a speculator has information or analysis, which forecasts an upturn in a price, then
he can go long on the forward market instead of the cash market. The speculator would go
long on the forward, wait for the price to rise, and then take a reversing transaction to book
profits. Speculators may well be required to deposit a margin upfront. However, this is
generally a relatively small proportion of the value of the assets underlying the forward
contract. The use of forward markets here supplies leverage to the speculator.

Future Vs Forward Market

FUTURE FORWARD

27
1. Trading is conducted in a competitive 1. Trading is done by telex or telephone, with
arena by “open outcry” of bids, offers, and participants generally dealing directly with
amounts. broker-dealers.

2. Contract terms are standardized with all 2. All contract terms are negotiated privately
buyers and sellers negotiating only with by the parties.
respect to price.

3. Non-member participants deal through 3. Participants deal typically on a principal-

brokers (exchange members who represent to-principal basis.
them on the exchange floor.

4. Participants include banks, corporation’s 4. Participants are primarily institutions

financial institutions, individual investors, dealing with one other and other interested
and speculators. parties dealing through one or more dealers.

5. The clearing house of the exchange 5. A participant must examine the credit risk
becomes the opposite side to each cleared and establish credit limits for each opposite
transactions; therefore, the credit risk for a party.
futures market participant is always the same
and there is no need to analyze the credit of
other market participants.

6. Margins deposits are to be required of all 6. Typically, no money changes hands until
participants. delivery, although a small margin deposit
might be required of non dealer customers on
certain occasions.

7. Settlements are made daily through the 7. Settlement occurs on date agreed upon
exchange clearing house. Gains on open between the parties to each transaction.
positions may be withdrawn and losses are

28
collected daily.

8. Long and short positions are usually 8. Forward positions are not as easily offset
liquidated easily. or transferred to other participants.

9. Settlements are normally made in cash, 9. Most transactions result in delivery.

with only a small percent age of all contracts
resulting actual delivery.

10. A single, round trip (in and out of the 10. No commission is typically charged if the
market) commission is charged. It is transaction is made directly with another
negotiated between broker and customer and dealer. A commission is charged to both
is relatively small in relation to the value of buyer and seller, however, if transacted
the contract. through a broker.

11. Trading is regulated. 11. Trading is mostly unregulated.

12. The delivery price is the spot price. 12. The delivery price is the forward
price.

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SWAPS:
A swap is an arrangement between 2 parties for the exchange of a stream of cash
flows over a specified term. The Currency swaps involve the exchange of a stream of cash
flow in one currency for a stream of cash – flows in another currency. The swap market can
be said to date from 1981, the year in which IBM and world Bank effected a swap
transaction. There are many types of swaps such as “Currency swaps”, “Interest Rate Swaps”
etc. All these swaps work on the principle that different institutions have different
comparative advantages, and that as a result, there can be gains from any 2 institutions
trading with each other, Now, we will discuss in detail about the currency swaps and interest
rate swaps.

Currency swaps
These are the agreements to exchange payments in one currency for these in another.
The structure of a currency swap in similar to a forward contract or futures contract in foreign
exchange, most of these swaps involve the U.S. $ on one side of the transaction, However,
direct currency combination like the D.M. & Y are also gaining importance. A currency swap
normally consists of the following 3 elements.
• There is an exchange of principal at the beginning of the swap. One party exchanges
one currency for another currency at an agreed rate of exchange.
• At regular intervals, normally 6 monthly or annually, there is an exchange of
payments. It is convenient to think of these as interest payments on the swapped
amount of principal. But it must be remembered that swaps are not loans. The amount
to be exchanged by each party is calculated as a “Swap Rate” on the amount of
principal exchanged. This might be fixed rate or floating rate.
• At the end of the term of the swap, there is a re-exchange of the principal amounts
with each party repaying the currency that was received at the start of the swap
period. The rate of exchange is therefore exactly the same as for the initial exchange
of principal.

30
Interest Rate Swaps:
An interest rate swap is an agreement between 2 parties to exchange fixed interest rate
payments for floating interest rate payment or vice versa in the same currency, calculated
with reference to an agreed national amount of principal. The principal amount which is
equivalent to the value of the underlying assets or liabilities that are swapped is never
physically exchanged but is used merely to calculate interest payments. The purpose of the
swap is to transform a fixed rate liability into a floating rate liability and vice versa. The
floating rate that is used in most swaps is calculated with reference to London Inter Bank
Offer Rate (LIBOR). Interest rate swaps have a similar structure to interest rate futures in the
sense that the terms of the future obligations under the swap are determined today. The
motive underlying an interest swap is to exploit a comparative advantage and to make a gain
from the swap.

31
 Chapter 5

Participants:

The following three broad categories of participant’s hedgers, speculators, and

arbitrageurs trade in the derivatives market.

Hedgers:
Hedgers face risk associated with the price of an asset. They use futures or options
markets to reduce or eliminate this risk. Hedging does not always make money. The best that
can be achieved using hedging is the removal of unwanted exposure, i.e. unnecessary risk.
The hedged position will make less profit than the un hedged position, half the time.

Illustration:
Amp enters into a contract with Saru roopa that six months from now he will sell to
Saru roopa 10 dresses for Rs 4000. The cost of manufacturing for Amp is only Rs 1000 and
he will make a profit of Rs 3000 if the sale is completed.

However, Amp fears that Saru roopa may not honour his contract six months from
now. So he inserts a new clause in the contract that if Saru roopa fails to honour the contract
she will have to pay a penalty of Rs 1000. And if Saru roopa honours the contract Amp will
offer a discount of Rs 1000 as incentive.

If Saru roopa defaults Amp will get a penalty of Rs 1000 but he will recover his initial
investment. If Saru roopa honours the contract, Amp will still make a profit of Rs 2000.
Thus, Amp has hedged his risk against default and protected his initial investment.

32
Speculators:
Speculators are those who do not have any position on which they enter in futures and
options market. They only have a particular view on the market, stock, commodity etc. In
short, speculators put their money at risk in the hope of profiting from an anticipated price
change. They consider various factors such as demand supply, market positions, open
interests, economic fundamentals and other data to take their positions. Speculators wish to
bet on future movements in the price of an asset. Futures and options contracts can give them
an extra leverage that is they can increase both the potential gains and potential losses in a
speculative venture.

Illustration:
Amp is a trader but has no time to track and analyze stocks. However, he fancies his
chances in predicting the market trend. So instead of buying different stocks he buys Sensex
Futures.

On May 1, 2001, he buys 100 Sensex futures @ 3600 on expectations that the index
will rise in future. On June 1, 2001, the Sensex rises to 4000 and at that time he sells an equal
number of contracts to close out his position.

Selling Price: 4000*100 = Rs 4, 00,000

Less: Purchase Cost: 3600*100 = Rs 3, 60,000
_____________

Net gain Rs 40,000

--------------------

Amp has made a profit of Rs 40,000 by taking a call on the future value of the Sensex.
However, if the Sensex had fallen he would have made a loss. Similarly, if would have been
bearish he could have sold Sensex futures and made a profit from a falling profit. In index
futures players can have a long-term view of the market up to at least 3 months.

33
Arbitrage:
Arbitrageurs are in business to take advantage of a discrepancy between prices in two
different markets. An arbitrageur is basically risk averse. He enters into those contracts were
he can earn riskless profits. When markets are imperfect, buying in one market and
simultaneously selling in other market gives riskless profit. Arbitrageurs are always in the
lookout for such imperfections.
If, for example, they see the futures price of an asset getting out of line with the cash
price, they will take offsetting positions in the two markets to lock in a profit.

Illustration:
Let us take the example of single stock to understand the concept better. If Wipro is
quoted at Rs 1000 per share and the 3 months futures of Wipro is Rs 1070 then one can
purchase ITC at Rs 1000 in spot by borrowing @ 12% annum for 3 months and sell Wipro
futures for 3 months at Rs 1070.

Sale = 1070
Cost= 1000+30 = 1030
Arbitrage profit = 40

These kinds of imperfections continue to exist in the markets but one has to be alert to
the opportunities as they tend to get exhausted very fast.

Structure of Derivative Markets in India

Derivative trading in India takes can place either on a separate and independent
Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative
Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the
oversight regulator. The clearing & settlement of all trades on the Derivative
Exchange/Segment would have to be through a Clearing Corporation/House, which is
independent in governance and membership from the Derivative Exchange/Segment.

34
Working of Derivatives markets in India
Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory
framework for derivative trading in India. SEBI has also framed suggestive byelaw for
Derivative Exchanges/Segments and their Clearing Corporation/House which lays down the
provisions for trading and settlement of derivative contracts. The Rules, Bye-laws &
Regulations of the Derivative Segment of the Exchanges and their Clearing
Corporation/House have to be framed in line with the suggestive Bye-laws. SEBI has also
laid the eligibility conditions for Derivative Exchange/Segment and its Clearing
Corporation/House.

The eligibility conditions have been framed to ensure that Derivative

Exchange/Segment & Clearing Corporation/House provide a transparent trading
environment, safety & integrity and provide facilities for redressal of investor grievances.

Some of the important eligibility conditions are-

 Derivative trading to take place through an on-line screen based Trading System.
 The Derivatives Exchange/Segment shall have on-line surveillance capability to
monitor positions, prices, and volumes on a real time basis so as to deter market
manipulation.
 The Derivatives Exchange/ Segment should have arrangements for dissemination of
information about trades, quantities and quotes on a real time basis through at least
two information vending networks, which are easily accessible to investors across the
country.
 The Derivatives Exchange/Segment should have arbitration and investor grievances
redressal mechanism operative from all the four areas / regions of the country.
 The Derivatives Exchange/Segment should have satisfactory system of monitoring
investor complaints and preventing irregularities in trading.
 The Derivative Segment of the Exchange would have a separate Investor Protection
Fund.
 The Clearing Corporation/House shall perform full notation, i.e., the Clearing
Corporation/House shall interpose itself between both legs of every trade, becoming
the legal counterparty to both or alternatively should provide an unconditional
guarantee for settlement of all trades.

35
  The Clearing Corporation/House shall have the capacity to monitor the overall
position of Members across both derivatives market and the underlying securities
market for those Members who are participating in both.
 The level of initial margin on Index Futures Contracts shall be related to the risk of
loss on the position. The concept of value-at-risk shall be used in calculating required
level of initial margins. The initial margins should be large enough to cover the one-
day loss that can be encountered on the position on 99% of the days.
 The Clearing Corporation/House shall establish facilities for electronic funds transfer
(EFT) for swift movement of margin payments.
 In the event of a Member defaulting in meeting its liabilities, the Clearing
Corporation/House shall transfer client positions and assets to another solvent
Member or close-out all open positions. The Clearing Corporation/House should have
capabilities to segregate initial margins deposited by Clearing Members for trades on
their own account and on account of his client. The Clearing Corporation/House shall
hold the clients’ margin money in trust for the client purposes only and should not
allow its diversion for any other purpose.
 The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the
trades executed on Derivative Exchange / Segment.
Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE
and the F&O Segment of NSE.

Membership categories in the Derivatives Market

The various types of membership in the derivatives market are as follows:

1. Professional Clearing Member (PCM):

PCM means a Clearing Member, who is permitted to clear and settle trades on his
own account, on account of his clients and/or on account of trading members and their
clients.

2. Custodian Clearing Member (CCM):

CCM means Custodian registered as Clearing Member, who may clear and settle
trades on his own account, on account of his clients and/or on account of trading members
and their clients.

36
3. Trading Cum Clearing Member (TCM):
A TCM means a Trading Member who is also a Clearing Member and can clear and
settle trades on his own account, on account of his clients and on account of associated
Trading Members and their clients.

4. Self Clearing Member (SCM):

A SCM means a Trading Member who is also Clearing Member and can clear and
settle trades on his own account and on account of his clients.

5. Trading Member (TM):

A TM is a member of the Exchange who has only trading rights and whose trades are
cleared and settled by the Clearing Member with whom he is associated.

6. Limited Trading Member (LTM):

A LTM is a member, who is not the members of the Cash Segment of the Exchange,
and would like to be a Trading Member in the Derivatives Segment at BSE. An LTM has
only the trading rights and his trades are cleared and settled by the Clearing Member with
whom he is associated.

As on January 31, 2002, there are 1 Professional Clearing Member, 3 Custodian

Clearing Members, 75 trading cum Clearing Members, 93 Trading Members and 17 Limited
Trading Members in the Derivative Segment of the Exchange.

FUTURES AND OPTIONS MARKET INSTRUMENTS

The F&O segment of NSE provides trading facilities for the following derivative
instruments:
 Index based futures
 Index based options
 Individual stock options
 Individual stock futures

37
Order types and conditions:
The system allows the trading members to enter orders with various conditions
attached to them as per their requirements. These conditions are broadly divided into the
following categories:
 Time conditions
 Price conditions
 Other conditions
Several combinations of the above are allowed thereby providing enormous flexibility
to the users. The order types and conditions are summarized below.

Time conditions
- Day order: A day order, as the name suggests is an order which is valid for the day on
which it is entered. If the order is not executed during the day, the system cancels the
order automatically at the end of the day.
- Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a contract as
soon as the order is released into the system, failing which the order is cancelled from
the system. Partial match is possible for the order, and the unmatched portion of the
order is cancelled immediately.

Price condition
- Stop-loss: This facility allows the user to release an order into the system, after the
market price of the security reaches or crosses a threshold price e.g. if for stop-loss
buy order, the trigger is 1027.00, the limit price is 1030.00 and the market (last
traded) price is 1023.00, then this order is released into the system once the market
price reaches or exceeds 1027.00. This order is added to the regular lot book with
time of triggering as the time stamp, as a limit order of 1030.00. For the stop-loss sell
order, the trigger price has to be greater than the limit price.

38
Other conditions

- Market price: Market orders are orders for which no price is specified at the time the
order is entered (i.e. price is market price). For such orders, the system determines the
price.
- Trigger price: Price at which an order gets triggered from the stop-loss book.
- Limit price: Price of the orders after triggering from stop-loss book.
- Pro: Pro means that the orders are entered on the trading member's own account.
- Cli: Cli means that the trading member enters the orders on behalf of a client.

CHARGES
The maximum brokerage chargeable by a trading member in relation to trades
effected in the contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5% of
the contract value in case of index futures and stock futures. In case of index options and
stock options it is 2.5% of notional value of the contract [(Strike Price + Premium) *
Quantity)], exclusive of statutory levies. The transaction charges payable to the exchange by
the trading member for the trades executed by him on the F&O segment are fixed at the rate
of Rs. 2 per lakh of turnover (0.002%) subject to a minimum of Rs. 1, 00,000 per year.
However for the transactions in the options sub-segment the transaction charges are levied on
the premium value at the rate of 0.05% (each side) instead of on the strike price as levied
earlier. Further to this, trading members have been advised to charge brokerage from their
clients on the Premium price (traded price) rather than Strike price. The trading members
contribute to Investor Protection Fund of F&O segment at the rate of Re. 1/- per Rs. 100
crores of the traded value (each side).

39
 Chapter 6

Conclusion:
From the study of Derivatives at Karvy it is clear that derivatives play a
vital role in the International financial market. Derivative emerged as a hedging
instrument but it is used for speculation and arbitration too. It does not focus
any individual. Hence individual investors are affecting due to the arbitration
and speculation as the risk is transferred. There exchange should have
arbitration and investor grievances redressal mechanism operative from all parts
of the region. Hence Karvy - The Finapolis provide a wonderful service to the
individual investors too by providing services like advisory services.

40
Bibliography
Book source:

 Fundamentals of Futures and Options Markets

(John C. Hull)

 Financial Derivatives
(V. K. Bhalla)

 Futures and Options

(D. C. Gardner)

Internet source:

 www.google.com

 www.nseindia.com

 www.karvy.com

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