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A Study on Index Futures As a Hedging Instrument In

Soumi Pramanik (09YACMA091) Mr.Soman Nambiar Presidency College

INDUSTRY PROFILE
Stock exchange is an entity that provides services for stock brokers and traders to trade in stocks, bonds, and other securities. There are 23 stock exchanges in India,2 are of national level & rest 21 are at regional level. Keeping in mind the market capitalization,BSE & NSE ranks 8th &9th amongst all the major stock exchanges in the world. Separate exchanges are also there for trading of commodities,F&O. BSE(oldest stock exchange in Asia)-5000 companies listed & ranks one in terms of no. of companies listed. NSE -1992,nearly 1800 companies listed.

COMPANY PROFILE
BgSE Financials Ltd. is a subsidiary of Bangalore Stock Exchange(BgSE). Incorporated in 1999. Membership with National Stock Exchange of India Ltd.(NSE) and Bangalore Stock Exchange Ltd.(BSE) Single Window trading facility. Departments such as DP, Finance, Administration & HR, Surveillance & Risk Management , RTA , Clearing & Settlement department,etc. Its registered sub-brokers in Karnataka, Chennai & Hyderabad.

Contd.
Services offeredDP Services Online Trading at NSE/BSE Trading in F&O IPO RTA Services GOI Relief Bonds/Capital Gain Bonds/Tax Saving Bond Debt market segment of NSE & IPO, etc.

RESEARCH METHODOLOGY
Type Descriptive & Analytical Research Statement of Problem To analyze how effective is the Index Futures for hedging risks in financial environment, vis--vis other derivative instruments. Objectives - To study the risks involved in Financial Environment. - Understanding tools in Financial Risk Management. - Study of Index Futures as a risk hedging tool. - Comparison of other derivative instruments ,w.r.t., index futures in relation to managing risks.

METHOD OF STUDY
Collection of Data Primary Source- Questionnaires filled by staff of BgSE Financials Ltd. Secondary Source- Graphs , Charts, Internet, Live example, Article ,etc. Sample Size 50 questionnaires Simple Random Sampling

LIMITATION OF STUDY
Study considers only data collected by the brokers. Data collected is assumed to be correct. Needs further research as based on previously published journals and articles. Time constraints.

PLAN OF ANALYSIS
Based on Primary & Secondary data collected. Analysis mainly focuses on open-ended questions ,such as, if he/she considers Index Futures as a hedging instrument to minimize risk against Stock Futures? disadvantages that restricts trading of Stock Index Futures. if any basic strategy followed for trading Futures? Also given emphasis on closed-ended questions, such as, risk & liquidity perception regarding Futures, dominant factor that has increased its trading, type of investors mostly involved & awareness level regarding this instrument, etc.

FINDINGS
Trading of Index Futures is usually settled in cash. Means of capital appreciation for investors. Marked to marked settlement. High liquidity Where speculation is the main motive, trading in Index Futures efficiently hedges risk of investors. Margin prevents the investor from taking high risks. Duration of futures contract is fixed, i.e., in BSE expiry will be on last Thursday of the month. in NSE expiry will be on last Friday of the month.

Contd.
Highly leveraged. Stock Index Futures also surrogates for Stock Purchases. Speculators and Hedgers mostly trade in Stock Index Futures. Bigger lot size, high volatility & unknown future circumstances are some of the disadvantages that restricts from trading of futures. Profits in both bull & bear market. Lower transaction costs. Futures trading has made the worlds stock market more volatile than ever before. Short selling possible.

SUGGESTION
Awareness level should be increased among traders. Trading of futures will only help the investors to minimize their risk ,not in avoiding risk. Margin should be maintained by the investor trading in future, either, in the form of any collateral security or in form of cash. Proper timing strategy should be followed by those who trade in index futures. It is better to go for futures trading on those stocks which are listed in Nifty & Jr.Nifty. Should take long position when value of stock is expected to increase & take short position when value of stock is expected to decrease.

CONCLUSION

Stock Options are best instruments to minimize the risks as compared to Stock Index Futures , as there is always a difference in futures price & the actual index price . But since due to certain factors, such as ,high liquidity,leverage,low transaction costs ,etc. makes it a better instrument to minimize the risk.