A STUDY ON FUTURES AND OPTIONS

OBJECTIVES OF STUDY
To study role and various trends in derivative market. Comparison of the profits/losses in cash market and derivative market. To find out profit/losses position of the option writer and option holder. To study how hedgers use the F&O s to overcome risk of loss

SCOPE OF THE STUDY

The study is limited to Derivatives with special reference to futures and options in the Indian context; the study is not based on the international perspective of derivative markets. The study is limited to the analysis made for types of instruments of derivates each strategy is analyzed according to its risk and return characteristics and derivatives performance against the profit

METHODOLOGY
To achieve the objective of studying the stock market data has been collected. The secondary information is mostly taken from NSE website , books, & journals etc.

LIMITATION OF THE STUDY

The subject of derivates if vast it requires extensive study and research to understand the dept of the various instrument operating in the market. But various international examples have also been added to make the study more comfortable There are various other factors also which define the risk and return preferences of an investor how ever the study was only contained towards the risk maximization and profit maximization objective of the investor. The derivative market is a dynamic one premiums, contract rates strike price fluctuate on demand and supply basis. Therefore data related to last few trading months was only consider and interpreted.

DEFINITION OF DERIVATIVE
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.

PARTICIPANTS 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. Speculators: 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. Arbitrageurs: Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets

TYPES OF DERIVATIVES
Forwards: A forward contract is customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price 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.

Options: Options are of two types calls and puts

DIFFERENCE BETWEEN FUTURES & OPTION

FUTURES
With futures premium is paid by either party

OPTIONS
With options, the buyer pays the seller a premium

The parties to futures contracts must perform at the settlement date only. They are not obligated to perform before that date.

The buyer of an options contract can exercise any time prior to expiration date.

DATA ANALYSIS AND INTERPRETATION

SUN PHARMA

FUTURE ANALYSIS If client A bought sunpharam on jan 3rd and sold jan 17th,then his net obligation could be Price of sunpharma future on jan3rd = Z 489.775 Price of sunpharma on jan 17 th = Z 474.15 Profit /loss = 474.15 -489.775 = -15.625 Total/loss = loss per share lot sze = -15.625 625 = (9765.625)

 If client B bought sunpharma futures on jan 3rd and short sunpharma futures. He sells stock on jan 25th net obligation is =481.375 - 489.975 = -8.6 He buy back sunpharma futures on 25th net obligation is = 489.55 481.5 =8.05 Hedge ratio = spot price / future price = 8.6 / 8.05 = 1.068 Hence this strategy yields 100% of investment made is protected.

Call Option Analysis

ON DEC 15th For 480strike price Spot price Strike price 450.55 -480.00 -29.45 Callpremium 9.20 Call premium Net 6 lots,lot size For 490strike price Spot price Strike price 450.55 - 490.00 -39.45 9.25 30.20 * 3750 113250 Call premium Net 6 lots,lot size For 500strike price Spot price Strike price 450.55 -500.00 -49.45 3.85 45.60 *3750 171000

Net 20.25 6 lots,lot size * 3750 75937.5

DEC 30

For 480strike price

For 490strike price

For 500strike price

Spot price Strike price

480.725 -480.00 -0.725

Spot price Strike price

480.725 - 490.00 -9.275

Spot price Strike price

480.725 -500.00 19.275

Callpremium

25

Call premium Net 1.275 6 lots,lot size

Call premium

3.00

Net 24.275 6 lots,lot size * 3750 91031.25

Net 16.275 6 lots,lot size *3750

* 3750 4781.25

61031.25

PUT OPTION ANALYSIS

ON

DEC 15TH

For 480strike price

For 490strike price

For 500strikeprice

Strike price 500.00 Spot price

480.00

Strike price Spot price

490.00 450.5 40.55

Strike price Spot price 450.55 50.55 Call premium Net 6 lots,lot size 105.7 55.17 *3750

450.55 30.55 Call premium

13.2

Callpremium Net

194.7

Net -27.35 6 lots,lot size * 3750

-164.15

6 lots,lot size

* 3750
615562.5

102562.5

206812.5

ON DEC 30TH

For 480strike price

For 490strike price

For 500strikeprice

Strike price Spot price

480.00 480.725 0.725

Strike price Spot price

490.00 480.725 9.275

Strike price Spot price

500 480.725 19.275

Callpremium Net

194.7

Call premium

13.2

Call premium Net 6 lots,lot size

2 17.275 *3750 64781.35

-193.975 * 3750

Net -3.925 6 lots,lot size * 3750

6 lots,lot size

727406.25

14718.75

Hedging Using Options If client has to bought sunpharma options on jan 3rd He had to buy 480 call option and 500 put option as spot price on that day was 450.55
To make perfect hedging pay of 480 call option on jan 10th =spot price -strike price-call premium =484.825 - 489 - 15 =10.175 Pay off of 500 put option on jan 10th Strike price-spot price- call premium = 500 484.825 30 = 10.25 Hedge ratio = call pay off / put pay off = 10.175 / 10.25 =0.075 Hedge ratio of 0.07 indicates perfect hedging using option

FINDINGS
Its too risky to enter into derivatives contract if the investor does not posses the asset Derivatives are mostly used for hedging In cash market, the Investor has to pay the total money but in the Derivatives market the Investor has to pay premiums or margins which are of some percentage of the total money.

Suggestions
The Derivatives markets is newly started in India and its not known by everyone so, SEBI should act to create awareness in the people about this derivatives market. SEBI has to take measures to use effectively the derivatives segment as a tool of hedging

Conclusion
From the above project it proved that the underlying stock values changes according to the news. Depending on underlying stock prices the derivative values also changes. By doing above analysis we can know when to buy, at what time to sell and how much risk we can take.