Hedging with Option strategy

COCHIN STOCK EXCHANGE LTD

“A Study on Hedging with Index Options using S&P CNX NIFTY Index with special reference to Cochin Stock Exchange Ltd”

PROJECT REPORT PROJECT DONE BY ANPU MATHEW SIMON UNDER THE GUIDANCE OF SONY JOSEPH (FACULTY) SB COLLEGE, BIMS, Changanacherry

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Introduction

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1.1 Introduction
Capital market plays as important role in the economic development a country. It is a major segment of the financial system of the country. Main function of a capital market is to converts savings of the people towards profitable investments. “Capital market refers to the institutional arrangements for facilitating the borrowing and lending of long term funds”. The capital market is the market for securities, where companies and governments can raise long-term funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the debenture market. The capital markets consist of the primary market and the secondary market. The primary markets are where new stock and bonds issues are sold to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange. Risk is a characteristic feature of all commodity and capital markets. Investing in securities is profitable as well as exciting. It is indeed rewarding but involves a great deal of risk. There is no return without risk. Higher the risk, higher the return. Lower the risk, lower the return. Neither is desirable. A certain level of risk is desirable and should be taken particularly when tools that minimize the risk are available. Risk and returns in the case of an investment are like the two sides of the same coin. Though high returns are the basic motive behind investment, the dodgy element of risk cannot be overlooked. Now, future is uncertain, so one has to protect oneself from future uncertainties. So one hedges against possible uncertainties and mitigates risk by counterbalancing. Hedging refers to a method of reducing the risk of loss caused by price fluctuation. Portfolio managers and corporations use hedging techniques to reduce their exposure to various risks. Derivatives are an important tool used for hedging. Derivatives include options, futures, swaps etc.

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Derivatives treated as one of the remarkable developments in the financial markets. Derivatives are financial instruments which help in reducing the impact of business risks. Derivative is a mechanism for covering against risks. 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 most commonly used derivatives contracts are forwards, futures and options. The importance of derivative is that it helps in transferring risk. Making clearer it can't eliminate risk but can transfer. Derivatives act as a risk management tool. Derivatives allow investors to leverage relatively small amounts of funds over a wide class of assets and thus diversify their portfolios. Derivative prices reveal information to investors and provide more stability to the financial markets. The risk associated with derivatives depends upon how these securities are used in a particular market and economic environment. Though the derivative market(s) exist where standardized derivative are traded on formal, legally recognized and legally unrecognized markets where many privately negotiated customized financial contracts (derivative) are traded, which are known as Over the Counter (OTC) derivatives. Such OTC traded financial contracts expose markets to a great amount of financial, operational, counterparty, liquidity and legal risk. The emergence of the market for derivative products, most notably forwards, futures and options can be traced back to the willingness of the risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products it is possible to partially of fully transfer the price risks by locking in asset prices. As instruments of risk management, these generally do not influence the fluctuations in asset prices on the profitability and cash flow situation of risk averse investors.

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1.2 Statement of the Problem
Every investment is characterized by risk and return. An investment whose returns are fairly stable is considered to be a low risk investment , where as an investment whose returns fluctuate significantly is considered to be a high risk investment. Capital market is one of the most risky places for investment. But the return from the capital market investment is always high. Therefore share become an attractive area for investment. Traditionally rising markets (bullish) have been profit making times and falling markets (bearish) have given risk to losses for ordinary investors. This is because on a cash market the only way of capitalizing on a bearish view is to short stock with an intention to buy it back when the prices have fallen. However, due to the uncertainties this is not a viable proposition unless the investors already hold a stock or have some way of borrowing the stock in order to short it. An investor is able to make money expecting the market or a particular stock to go up or down by two different ways; by simple thinking and analyzing using probability. According to studies both the ways are proved to be risky. When considering the investment in Derivatives, the options are less, so the probability of loosing investment is also less. The derivatives especially the financial derivatives are now a days emerging trend in the financial market. 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. The financial derivatives are used to minimize the losses of investors. The risk taking investors who are ready to take risk can maximize their profit by using derivatives. Derivative market provides a few ways to do this by allowing us to do transactions that provides payoff, which are the same as or similar to short selling. Derivative instruments thus offer several avenues or gaining even in the bearish market. This flexibility is one of the features that make this market so attractive for the investors. Berchmans Institute of Management Studies, Changanacherry
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Futures and Options are now traded on many exchanges throughout the world. A hedge is any act that reduces the price risk of an existing or anticipated position in the cash market. An Option contact involves a right to buy or a right to sell an asset of certain time in the future for a certain price. There are two types of Options: Call Option and Put Option. A Call Option gives the holder the right to buy an asset by a certain date for a certain price. A Put Option gives the holder to sell an asset by a certain date for certain price. A put optimal portfolio is a group of securities, which gas the maximum return and minimum risk. The main focus of the study is to find out the effectiveness of Index Options as a hedging technique. As the share market is volatile i.e. Changes may happen at any time, the risk and return are equally uncertain so the investor has always of fear in his mind. The risk and uncertainty need to be minimized. Hence the present stock seeks to reduce the risk uncertainty using hedging technique trading. In a highly unpredictable market such as the stocks, hedging plays a crucial role in protecting an investor against losses resulting from unforeseen price or violating changes after a detailed study, the researcher is convinced of the significance of Hedging as it helps reduce risk in an effective manner.

1.3
• • • • •

Objectives
To have an understanding about the derivative market and instruments. To understand the various risks associated with investments and the risk minimizing techniques. To know the effectiveness of Hedging. To know the role of Index Options in Hedging. To know how to make profit even in the falling (bearish) market.

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Industry Profile

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2.1 Industry Profile
The capital market is a market for financial assets, which have longer or indefinite maturity. Generally, it deals with long-term securities which have maturity period of above one year. The capital market may be further divided into three namely. 1. Industrial securities market 2. Government securities market 3. Long-term loan market The industrial market, which deals with shares and debentures, can further be divided into: • • Primary market Secondary Market

2.1.1

New issue market (Primary market)

Stocks available for the first time are offers through new issue market. The issuer may be new company or an existing company. These issues may be of new type or the security used in the past. In the new issue market the issuer can be considered as a manufacturer. The issuing houses, investment bankers’ and brokers act as the channel of distribution for the new issue. The Functions The main service function the primary market ate organization underwriting and distribution. Organization deals with the origin of the new issue. The Proposal is analyzed in terms of nature of security, the size of the issue and flotation method of issue. Underwriting contract makes the share predictable and removes the element of uncertainty in the subscription. This carried out with the help of the lead managers and brokers to the issue

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2.1.2

Secondary market

Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and / or listed on the stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides and efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit – by facilitating value-enhancing control activities, enabling implementation of incentivebased management contracts, and aggregating information (via price discovery) that guides management decisions. Stock exchange Stock Exchange is an organized marketplace where securities are traded. These securities are by the government, semi-government Bodies, Public sector undertakings and companies for borrowing funds and raising resources. Securities are defined as monetary claims and include stock, shares, debentures, bonds etc. If these securities are marketable as in the case of Government stock, they are transferable by endorsement and are like movable property. Under the securities Contract Regulation Act of 1956, securities trading are regulated by the Central Government and such trading can take place only in Stock Exchange recognized by the Government under this Act. At present there are 23 recognized stock Exchanges in India. Of these major Stock Exchange, like Mumbai, Calcutta, Delhi, Chennai, Hyderabad, Bangalore etc. are permanently recognized while a few are temporarily recognized.

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Functions of Stock exchange 1. Maintains Active Trading Shares are traded on the stock exchanges, enabling the investors to buy and sell securities. The prices may vary from transaction to transaction. A continuous trading increases the liquidity or marketability of the shares traded on stock exchanges. 2. Mobilizing savings for Investment When people draw their savings and investment in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry resulting in a stronger economic growth and higher productivity levels. 3. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets 4. Fixation of prices Price is determined by the transactions that flow from investor’s demand and supplier’s preference. Usually the traded prices are made known to the public. This helps the investors to make better decisions. 5. Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford.

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6. Barometer of the economy Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. 7. Ensures safe fair dealing The rules, regulations and by laws of the stock exchanges provide a measure of safety to the investors. Transactions are conducted under competitive conditions enabling the investors to get a fair deal. 8. Dissemination of information Stock Exchanges provide information through their various publications. They publish the shares prices traded on daily basis along with the volume traded.

2.1.3

National Stock Exchange (NSE)

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 the recommendations of high powered Pherwani Committee, the National Stock Exchange 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. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market. Wholesale debt market operations are similar to money market operations - institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc. Berchmans Institute of Management Studies, Changanacherry
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There are two kinds of players in NSE: (a) Trading members (b) Participants. 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 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 a confirmation slip will be printed at the office of the trading member.

2.1.4 Over The Counter Exchange of India (OTCEI)
The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and binami 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 – UTI, ICICI, and IDBI etc. Trading at OTCEI is done over the centers spread across the country. Securities traded on the OTCEI are classified into: • 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 anywhere else • • Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded Initiated debentures - Any equity holding at least one lakh debentures of particular scrip can offer them for trading on the OTC. Berchmans Institute of Management Studies, Changanacherry
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2.1.5 Bombay Stock Exchange (BSE)
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and is currently engaged In the process of converting itself into demutualised and corporate entity. It has evolved over the years into its present status as the premier Stock Exchange in the country. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956. The Exchange, while providing an efficient and transparent market for trading in securities, debt and derivatives upholds the interests of the investors and ensures redresses 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 programmes and making available to them necessary informative inputs. A Governing Board having 20 directors is the apex body, which decides the policies and regulates the affairs of the Exchange. The Governing Board consists of 9 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 & Chief Executive officer and a Chief Operating Officer. The Executive Director as 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.

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Company profile

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2.2.1

Cochin Stock Exchange (CSE)

Cochin Stock Exchange limited (CSE) is one of he premier sock 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 listen in 1978-79, and had onl7 14 members. The trading operation on the Exchange commenced in 1980, 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. CSE introduced the facility of computerized trading called “Cochin Online trading” (COLT) on March 17, 1997. CSE is 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 markets. With the enforcement of efficient 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 faced 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 National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). CSBL is the first subsidiary of a Sock Exchange to get membership in both NSE&BSE, and become 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.

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2.2.2 Organization structure of CSE.
Board of Directors

Executive Director

Legal

Systems

CDSL

Settlement

Surveillance

Administration &
Personnel

Legal & Secretarial

Listing

Marketing & Public Relations

Finance

2.2.3 Legal framework of the organization
The Cochin stock exchange is directly under the control and supervision of Securities & Exchange Board of India (the SEBI), and is today a demutualised entity in accordance with thee Cochin Stock Exchange (Demutualization) Scheme. 2005 approved and notified by SEBI on 29th of August 2005

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2.2.4

Membership profile

Cochin Stock Exchange Currently has 508 members. All the members of CSE have a share each value of Rs100 thus making the issued, subscribed and paid up capital of Rs.50800. Thus authorized capital of CSE is Rs.100000with the total membership limited to 1000. As per the SEBI norms CSE charges an initial deposit of Rs.2 lakhs from each member. Based on the volume of trade each member is to contribute additional deposits. Along with this an annual subscription fee of Rs.200 for individual members and Rs.500 for corporate members will be charged by CSE. The members are appointing their assistants are sub brokers based on the guidelines given by the SEBI. During the 5 years membership each members have to pay Rs.5000 annually to SEBI as advance payment on or before 1st October of each financial year. From the 6th to the 10th year of membership of the total amount payable is Rs.5000 which is payable at the beginning of the 6th year (counted as payment of Rs.1000 per year).

2.2.5

Management of Cochin Stock Exchange

The policy decisions of the CSE are taken by the Board Of Directors. The Board is constituted with 12 members of whom less than one-fourth are elected from amongst the trading member of CSE, another one fourth are Public Interest Directors selected by SEBI from the panel submitted by the Exchange and the remaining are Shareholder Directors. The Board appoints the Executive Director who functions as an ex-officio member of the Board and takes charge of the administration of the Exchange. The Exchange is professionally managed, under the overall direction of the Board of Directors. The Board consists of eminent professionals from fields such as judiciary, administration and management, who are known as Public Interest Directors. The Public Interest Directors constitute one fourth of the total strength of the Board .The representation of brokers of the Exchange is limited to one fourth of the total strength of the Board .The remaining are representatives of shareholders without trading rights, called the Shareholder Directors. 2.2.6

Cochin Stock Brokers Limited.
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Rapid changes taking place in the capital market has dwindled the importance of Regional Stock Exchange. With the introduction of online trading by NSE and BSE investors could trade online from any remote location of the through a broker terminal. Taking into consideration all this developments and considering the future, the sock exchange decoded to start a 100% subsidiary called Cochin Stock brokers Limited (CSBL). This enabled the CSE to acquire membership of other stock exchange through its subsidiary. CSBL was incorporated on 28-12-1999 and later it got membership in NSE & BSE. The CSBL started its operation in full swing from February 2001. At present the CSBL offers trading in BSE&NSE with more than 50 registered brokers and this have been increasing day by day. Each member is given separate terminal for online trading. The staff in the exchange provides the necessary help for various matter involved in the trading activities.

2.2.7

Products & Services

Cochin Stock Brokers ltd (CSBL), a wholly owned subsidiary company of Cochin Stock Exchange is a corporate member of both NSE and BSI, and provides trading facilities on here exchange through the brokers if exchange. The subsidiary offers a wide range of products and services. 1. 2. 3. 4. 5. 6. Trading on National Stock Exchange Trading on Bombay Stock Exchange Internet Trading (WEBS) Depository Participant IPO (Initial Public Offer) Primary Market binding. Issue of new Shares.

2.2.8

Departmental profile
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The Cochin Stock Exchange carries on its functions through seven main department s. 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 department s. The various functional department Stock under Cochin Stock Exchange are:  Finance department  Administration department  Surveillance department  Legal department  Systems department  Settlement Department  Listing

Finance Department This department takes care of the various financial transactions of CSI thus acting as the life line of the organization. The department is headed by a Finance officer and assisted by Deputy Manager and several senior and junior officers Administration Department A legal officer with two deputy manager for administration and complains and management information system heads the department two senior officers looking after public relations and administration form part of administration

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Surveillance Department The Exchange has setup Surveillance Department to keep close watch on price movements of scrip, detect market abuses like price rigging, monitor abnormal price and volumes which are not consistent with normal trading pattern etc. The main objectives of the department are top be provide a free and fan market, to arrest unsystematic risk form entering into the system and to manage risks. The surveillance function at the exchange has assumed greater importance in the last few years. SEBI has directed the stock exchanges to set up a separate surveillance dep0artment with staff exclusively assigned for this function. Legal Department CSE has a full - fledged Legal Department, by Manger-Legal and is primarily engaged in advising the management in the merits and demerits of legal issues involving the exchange A major function under taken by the department is to ensure that the various rules, regulations and directives of SEBI with regard to trading in the Capital Market by brokers and sub brokers are brought to the notice to members and the investing public.

System department It is the heart of the various operations of CSE. The department provides stock the necessary technical supports for screen based trading and the computerized functioning of all other department. The various activities of the department include:• • • Developments of various software needed for functioning of the exchange Maintenance of Multex software, which provides online trading NSE and BSE. Maintenance of an effective network of computers for the smooth functioning of the exchange.

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The major back office system soft wares used are NESS and BOSS for NSE and BSE trade calculations respectively. These soft wares are developed in house by CSE. These soft wares are used organization maintain the entire records of all the trades that occur each day. It also does the require calculations for deductions and also crease kinds of reports needed by the brokers and their clients. Now a days CSE using CBRS (Core Broking Software). The clients and members are directly used by CBRS system. Listing department Listing means admission of the securities of a company to trading privileges on a Stock Exchange. The principal objectives of listing are to provide ready marketability and important liquidity and free negotiability to stock and shares; ensure proper supervision and control of dealings therein, and protect the Interests of shareholders and of the general investing public. Settlement Department Settlement department is a key department of the CSE. It is dealing with cash and securities. It helps the broker in setting the matters related to their pay in and payout, recovery of dues and selling the matters related to the bad deliveries. This department is headed by a Deputy Manager and assisted by two senior officers who look the operations involved in the settlement activities in CSE. CSE following T+2 settlement system (where T-dates of transaction)

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DERIVATIVES

3.1

DERIVATIVES
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A derivative is, as the name suggests, a financial contract whose value is derived from the value of another asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other word, 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 to an index of securities. The basic concept of derivative is a simple ancient one, with evidence that the Romans used them thousands of years ago, and that they have roots in Japan and Netherlands dating back to the early sixteenth century (Market History). A common example is a farmer use forward contract, type of derivative, to sell wheat before the harvest at a predetermined fixed price. The derivative in this case is used to protect the farmer against an expected decrease of the price in wheat, thus reducing g his exposure organization market risk (link organization market risk). On the other hand, the buyer accepts the risk associated with the fixed price and faces the possibility of either financial gain or loss, depending on the difference between the fixed price and the actual price at the time of harvest. Consequently, one may think of derivatives as 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 is a contract that specifies the rights and obligations between the issuer of the security is a contract that specifies the rights sand obligations between the issuer of the security and the holder to receiver 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 that are fully standardized like Futures and Options are generally traded through a securities exchange or future exchange.

3.1.1

Definition of Derivatives
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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. Example of derivatives includes futures and options. Advanced investors sometimes purchase or sell derivates to manage the risk associated with the underlying security, to protect against fluctuations in values, or to profit from periods of inactivity or decline. These techniques can be quite complicated and quite risky. Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation. Derivatives - contracts that gamble on the future prices of assets— are secondary assets, such as options and futures, which derive their value from primary assets, such as currency, commodities, stocks, and bonds. With securities Laws (Second Amendment) Act, 1999, Derivatives has been include in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:a. “Security derived from a debt instrument, share loan whether secured or unsecured, risk instrument or contract for difference or any other from of security”. b. “Contract which derives its value from the prices, or index of prices, of underlying securities”.

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3.1.2 Types of Derivatives instruments
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. All derivatives can be divided into two broad classes: linear and nonlinear. The distinction lies in how the derivatives function relates to the underlying asset value. Within this to classes are four general types of derivatives Furthermore, derivatives may be grouped as exchange –traded or over the counter (OTC). Exchange derivatives, which included furthers, are traditional, highly standardized contracts that readily provided liquidity and minimize credit risk. On other hand, OTC derivatives are customized to meet the need of the user. For what swaps are example of OTC derivatives. Options can be either exchange traded or OTC. Following are the types of derivative products.

a. Futures
Future Contracts organized/standardized contracts, which are traded on the exchanges. These contracts can be defined as “a standardized, exchange traded agreement specifying a quality and price of particular type of commodity (Soybeans, gold, oil, etc.) to be purchased or sold at predetermined date in the future”. On contract date, delivery and physical possession take place unless contract has been closed out. Futures are also available on various financial products and indexes today. Futures markets were design to solve the problem that exists in forward market. A future contracts an agreement between two parties to buy or sell asset at certain time in the future at a certain price but unlike forward contracts, futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standards features of the contracts. It is a standardized contracts with standard underline instrument, a standard quantity and quality of the underlying instrument that can be delivered, ( or which can be used for references purpose in settlement 0 and a standard timing of such settlement,. A futures contract may be offset prior to maturity by entering into an equal and opposite transactions. More than 99% of futures transactions are offset this way. Berchmans Institute of Management Studies, Changanacherry
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The standardized items in a futures contract are: 1. 2. 3. 4. 5. Quantity of the underlying Quality of the underlying The date and month of delivery The units of price of quotation and minimum price charge Location of settlement

Every futures contract is a forward contract, that they Are entered into through exchange, traded on exchange and clearing Corporation/ house provide the settlement guarantee for trades.  Are standard quantity; standard quality (In case of commodities)



Future contract is thus a forward contract, which trades on an exchange. S & P CNX Nifty futures are traded on National Stock Exchange. This provides them transparency, liquidity anonymity of trades, and also eliminates the counter party risk due to the guaranty provided by National Securities Clearing Corporation limited. A futures contract is one where there is an agreement between two parties to exchange any asset, currency, or commodity for cash at a certain future date, at an agreed price. There is no reference to an agreement ‘between two parties’ – this because futures contracts are often entered into through an intermediary (the exchange and seller to clearing house), which acts as the buyer to each seller and seller to each The Securities & Exchange Board of India (SEBI) regulates trading in futures. SEBI exists to guard against traders controlling the market in an illegal or un ethical manner, and to prevent to fraud in the futures market.

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b. Forward
A forward contract is one to one bi- partite contract, to be performed in the future, at the terms decided today. Forward contracts offer tremendous flexibility to the parties design the contract in terms of the price, quality (in case if commodities), delivery time and place but it suffers from poor liquidity and default risk. Forward contract different from a spot transaction, where payment of price and delivery of commodity concurrently takes place immediately the transaction is settled. In a forward contract the sale /purchase transaction of an asset is settled including the price payable, not for delivery/ settlement at spot, but a specified future date. India has strong dollar rupee forward market with contracts being traded for one, two …six– month expiration. Daily trading volume on this forward market is around $ 500 million a day. This contract includes currencies, stocks, swaps etc. Indian users of hedging services are also allowed to buy derivatives involving other currencies on foreign markets.

c. Swaps
A swap, another type of liner derivatives, is a contract that allows two parties to exchange, or swap, payments for a period of time based on some notional principle amount. Swaps are private agreement between two parties to exchange cash flows in the futures according to the pre-arranged formulae. The notional principle amount is not swapped, only the payment flows are exchange. i.e., Swaps are exchange of stream payment over agreed period. They can be regarded as a portfolio of forward contracts. Swaps are two types: 1. Currency Swaps: In currency swaps, currency potions are exchanged in the beginning, which are reversed. 2. Interest Rate Swaps: In interest rate swap only fixed interest obligation principle amount. The purpose of swap transactions is to take advantage of relative cost reduction. are exchanged with floating exchange rate obligations without exchanging the

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d. Options
Options are the standardized financial contracts that allows the buyer (holder) of the options, i.e. the right at the cost of option premium, not the obligation, to by (call options) or space sell (put options) a specified asset at a price on or before a specified date through exchanges under stringent financial securities against default. Options are instruments whereby the right is given by the option seller to option buyer to buy or sell asset at a specific prince price on or before a specific date.

e. 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.

f. Warrants
Options generally have lives of up to 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.

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

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3.2

Index derivatives

Index derivatives are derivative contracts which have the index as the underlying. The most popular index derivatives contracts over the world are index futures and index options. NSE's market index, the S&P CNX Nifty was scientifically designed to enable the launch of index-based products like index derivatives and index funds. The first derivative contract to be traded on NSE's market was the index futures contract with the Nifty as the underlying. This was followed by Nifty options, derivative contracts on sectoral indexes like CNX IT and BANK Nifty contracts. Trading on index derivatives were further introduced on CNX Nifty Junior, CNX 100, Nifty Midcap 50 and Mini Nifty 50. S&P CNX Nifty Options. NSE introduced trading in index options on June 4, 2001. The options contracts are European style and cash settled and are based on the popular market benchmark S&P CNX Nifty index. Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index. Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date. An index in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy. Indices that represent the whole market are broad based indices and those that represent a particular sector are sectoral indices.

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In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index is required to fulfill the eligibility criteria even after derivatives trading on the index have begun. If the index does not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be discontinued. By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry.

3.3 Derivatives in Indian context
Keeping in view, the experience of even strong and development economies the world over, it is no denying the fact hat financial market it extremely volatile in nature. India’s financial market is not an exception to this phenomenon. The attendant risk arising out of the volatility and complexity of the financial market is an important concern for financial analysis. As a result, there us a logical need for those financial instruments which allow fund managers to better manage or reduce these risks. Out of various risks, credit risk and interest rate risk are the two core risks, which are commonly acknowledged by various categories of financial health of business organization, especially banks. With gradual liberalization of Indian financial system and the growing integration among market stock, the risks associated with operations of banks and all India financial institutions have become increasingly complex requiring strategic management. In keeping with spirit of the guidelines on Asset-Liability Management system to deal with credit and market risk is also the need of the hour. Fr enabling he banks and the financial institutions, among others, to mange their risk effectively the concept of derivatives come into the picture.

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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 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

3.3.1 Development of derivatives market in India
The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on Options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24–member. Committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof. J.R.Varma, to recommend measures for risk containment in derivatives market in India. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE–30(Sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities.

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The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following factors have been driving the growth of financial derivatives: • • • • • 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 assets. over a large number of financial assets, leading to higher returns, reduced risk as well as trans-actions costs as compared to individual financial

3.3.2 Issues and opportunities in Indian Derivative Market
In India, there has been a phenomenal growth in derivative market in the last few years. However, there is still a long way to go. Institutional participation is still very low for a number of reason, the prime one among them is the position limit cap imposed by the regulator of FIIs. Each FIIs grows exposure in an Index product is restricted to a maximum of 15% of the open interest of Rs. 100 Cr. The limit for single stock product is 20% of the market wide limit or Rs.50 Cr. Whichever is lower.

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Since a FII having a large exposure to Indian market can only hedged a portion of his exposure because of the restrictive limit specified. Many FII prefer not to hedge their exposure at all rather than a hedged a small portion of their portfolio. These restrictive limits were laid down in 2002, which need to be revised since market conditions have changed a lot. More over there are number of FIIs who are active participant abroad and wish to play in Indian market are unable to get FII registration under current regulation. Thus it is essential that position limit of FIIs be increased and wider set of participant to increase the depth of the market and improve pricing mechanism are allowed. Trading in Options, which has remained relatively low will also increase. FII investment in spot equities will also move up if they get the confidence of hedging their positions in a liquid derivative market. Domestic players have negligible participation in derivative market because existing regulations do not permit them to use derivatives to hedge their portfolios. Another hurdle towards the growth of derivatives is over all the cap on the total gross position in any underlying asset, which is currently set at the lower of 30 times average daily volume in the stock of 10% free float. It is very essential that this limit also be revised. Indian debt markets are used to trading on an YTM basis whereas interest rate futures are settled on the basis of Zero Coupon Yield curve. It is because of this reason that interest rate futures have not become popular till date. Banks which are major players in fixed income market have been permitted to use futures only for hedging. This poses a restriction on their participation. Also there is a need for clarity regarding accounting and taxation of derivative.

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3.3.3

Structure of derivatives market in India

Derivative trading in India can takes place either on a separate and independent derivative exchange or on separate segment of an existing stock exchange. Derivative exchange/ segment function as a Self Regulatory Organization (SRO) and SEBI acts as the oversight regulator. The clearing and 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.

3.3.4
• •

Various types of membership in the derivatives market
Trading Member (TM) – A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients. Clearing Member (CM) –These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them.

•

Self-clearing Member (SCM) – A SCM are those clearing members who can clear and settle their own trades only.

3.3.5

Introduction to Index Numbers

An Index number measures the change in a set of values over a period of time. A stock Index number records the change in value of set stocks. An Index is a barometer for market behavior. It is treated to be a bench mark of portfolio performance. In this study researcher took the data from NSE and it’s index called S&P CNX NIFTY. Popular Indices in India • • • • • S&P CNX 500 S&P CNX NIFTY S&P CNX NIFTY JUNIOR BSE-30 SENSEX BSE-100 NATEX

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Trading Systems NSE’s trading system for its futures and options segment is called NEAT F&O. It is based on the NEAT system for the cash segment. BSE’s trading system for its derivatives segment is called DTSS. It is built on a platform different from the BOLT system though most of the features are common.

3.3.6

Minimum contract size

It has been specified that the value of a derivative contract should not be less than Rs. 2 lakh at the time of introducing the contract in the market. The contract size is frequently updated depending upon the current market price of the underlying. The standing committee on Finance, a parliamentary committee, at the time of recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum contract size of derivative contracts traded in the Indian markets should be pegged not below two lakhs. Based on this recommendation SEBI has specified that the value of a derivative contract should not be less than two lakh at the time of introducing the contract in the market. In February 2004, the Exchanges were advised to re-align the contracts sizes of existing derivative contracts to two lakhs. Subsequently, the Exchanges were authorized to align the contracts sizes as and when required in line with the methodology prescribed by SEBI.

3.3.7

Lot size of a derivative contract

Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying. For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrip’s stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

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3.3.8

Types of Traders in a Derivatives Market

Hedgers, speculators and arbitrators are the types of traders in derivatives market. Hedgers: Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. In this way he gets an assured fixed price of his produce. In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce rise enough to offset cash loss on the produce. Speculators: Speculators are some what like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as ‘going long’. Selling a futures contract in anticipation of a price decrease is known as ‘going short’. Speculative participation in futures trading has increased with the availability of alternative methods of participation.

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Speculators have certain advantages over other investments they are as follows: If the trader’s judgment is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. Arbitrators: According to dictionary definition, a person who has been officially chosen to make a decision between two people or groups who do not agree is known as Arbitrator. In commodity market Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets. If he finds future prices of a commodity edging out with the cash price, he will take offsetting positions in both the markets to lock in a profit. Moreover the commodity futures investor is not charged interest on the difference between margin and the full contract value.

3.4

Risks in Investments

The dictionary meaning of risk is the possibility of loss or injury. It is the possibility of the actual outcome being different from expected outcome. Risk is composed of the demands that bring in variations in returns of income. Risk means the variations in returns of income. Risk is an important consideration in holding any portfolio. Risk in holding securities is generally associated with possibility that realized returns will be less than the returns that were expected. The main forces contributing to risk are price and interest. Risk also influenced by external and internal considerations. The source of such disappointment is the failure of dividends (interest) and/or the security’s price to materialize as expected. Forces that contribute to variations in return price or dividend Berchmans Institute of Management Studies, Changanacherry
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(interest) constitute elements of risk. Some influences are external to the firm, cannot be controlled, and affect large numbers of securities. Other influences are internal to the firm and are controllable to a large degree. . In investments, those forces that are uncontrollable, external and broad in their effect are called sources of systematic risk. Conversely, controllable internal factors somewhat peculiar to industries and/or firms are refereed to as sources of unsystematic risk. The total variability return of a security represents the total risk of that security. Systematic risk and unsystematic risk are the two components of total risk .Thus, Total risk = Systematic risk +Unsystematic risk.

3.4.1

Systematic Risk

These are risk associated with the economic, political, sociological and other macro level changes. They effects and entire market whole and cannot be controlled or eliminated merely by diversifying one’s portfolio. These risks are undiversifiable. It affects the entire market. Systematic risk is further sub divided into interest rate risk, market risk, and purchasing power risk. Interest rate risk Rising the current market interest rates are bad news for fixed income investments because bond prices generally move in the opposite direction of interest rates. As the prices of bonds in a fund adjust to a rise in interest rates, the fund's share price may decline. Interest-rate risk refers to the uncertainty of future market values and of the size of future income, caused by fluctuations in the general level of interest rates Market risk Variability in return on most common stocks that is due to basic sweeping changes in investor expectations are referred to as market risk. Market risk is caused by investor reaction to tangible as well as intangible events. Expectations of lower corporate profits

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in general may cause the larger body of common to fall in price. Investors are expressing their judgment that too much is being paid for earnings in the light of anticipated events. The basis for the reaction is a set of real, tangible events political, social, or economic. Intangible events are related to market psychology. Market risk is usually touched off by a reaction to real events, but the emotional instability of investors acting collectively leads to a snow balling over reaction Purchasing Power Risk Purchasing-power risk is the uncertainty of the purchasing power of the amounts to be received. In more understandable terms, purchasing-power risk refers to the impact of deflation on an investment.

3.4.2

Unsystematic Risks

Unsystematic risk is the portion of total risk that is unique or peculiar to a firm or an industry, above and beyond that affecting securities markets in general. Factors such as management capability, consumer preferences, and labor strikes can cause unsystematic variability of returns for a company’s stock. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risk. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one’s portfolio. Following are the type of unsystematic risks

Financial risk Financial risk is associated with the way in which a company finances its activities. We usually gauge financial risk by looking at the capital structure of a firm. The presence of borrowed money of debt in the capital structure creates fixed payment in the form of interest that must be sustained by the firm. The presence of these interest commitments Berchmans Institute of Management Studies, Changanacherry
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fixed interest payments due to debt of fixed-dividend payments on preferred stock causes the amount of residual earnings available for common stock dividends to be more variable than if no interest payments were required. Financial risk is avoidable risk to the extent that managements have the freedom to decide to borrow or not to borrow funds. A firm with no debt financing has no financial risk. Business risk Business risk is that portion of the unsystematic risk caused by the operating environment of the business. This arises from the inability of a firm to maintain its competitive edge and the growth or stability of the earnings. Variation that occurs in the operating environment is reflected on the operating income and expected dividends. The variation in the expected operating income indicates the business risk. Business risk can be divided into two broad categories: external and internal. Internal business risk is associated with the operating efficiency of the firm. They are fluctuations in the sales, effectiveness of R&D department, good personnel management department, content of fixed cost in cost of production, product variety etc External business risk is the result of operating conditions imposes upon the firm by circumstances beyond its control. They are political conditions, business cycle, social and regulatory factors etc.

3.5

Measure of Beta (β )

Beta is a measure of systematic risk. It describes the relationship between the stock’s return and the Index returns. It measures the sensitivity of a scrip/portfolio vies-a-vies index movement. Beta of scrip is index specific, i.e., Beta of the same scrip vis-à-vis Sensex will be different from the beta value vies-a-vies Nifty. Also beta is a time frame specific value, i.e. beta of scrip vis-à-vis Sensex taking last 6 months historical data into consideration , will be different from the beta value that we get by taking the last oneyear date into consideration , keeping all the other parameters constant. Berchmans Institute of Management Studies, Changanacherry
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1. Beta = +1.0 One percent change in market index return causes exactly one percent change in the stock return hence they move in tandem. 2. Beta = +0.5. One percent change in market index return caused 0.5% change. so the stock is less volatile compared to the market . 3. Beta = +2.0 One percent change in market index return causes 2% change in the stock return, so the stock is highly volatile and hence risky. 4. Negative beta This value indicates that stock return moves in the opposite direction to the market return. A negative beta will give positive return.

3.6

Risk management

Every investor wants to guard himself from the risk. This can be done by understanding the nature of the risk and careful planning. Risk Management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events Risk management is the process of managing the risk to an acceptable level. Risk Management is the name given to a logical and systematic method of identifying, analyzing, treating and monitoring the risks involved in any activity or process.

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There are different methods for risk management. Diversification and hedging are the most commonly used methods. With the help of diversification we can reduce the unsystematic risk as it affects a particular company. Diversification spreads our risk across numerous financial investments; reducing the impact of poor returns from any one investment is likely to have on our portfolio. Diversification cannot eliminate market risk. Usually a well diversified portfolio will provide smoother returns that an investment in a single asset class. Hedging is one of the methods through which risk is managed. It refers to the process of protecting the price of a financial instrument or commodity at a date in the future by undertaking an off setting position in the present using futures, options, forward contracts or very other financial instrument.

3.7

Hedging

Risk and returns in the case of an investment are like the two sides of the same coin. Though high returns are the basic motive behind investment, the dodgy element of risk cannot be overlooked. Now, future is uncertain, so one has to protect oneself from future uncertainties. So one hedges against possible uncertainties and mitigates risk by counterbalancing. Hedging refers to a method of reducing the risk of loss caused by price fluctuation. Portfolio managers and corporations use hedging techniques to reduce their exposure to various risks. Hedging is the process of managing the risk of price changes in physical material by offsetting that risk in the futures market. Hedging can vary in complexity from a relatively simple activity, through to highly complex strategies, including the use of oppositions. The ability to hedge means that industry can decide on the amount of risk it is prepared to accept. It may wish to eliminate the risk entirely and can generally stock do so quickly and easily. Managing price risk means achieving greater control of either the cost of inputs, or revenues; and eliminating concerns that a sharply adverse move in the price of material could turn on otherwise flourishing and efficient business into a loss Berchmans Institute of Management Studies, Changanacherry
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maker. Hedging means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes. Hedging is a two-step process. A gain or loss in the cash position due to changes in price levels will be countered by changes in the value of a future position. If there is a fall in price, the loss in the cash market position will be countered by a gain in future position. Hedging by trade and industry is the opposite of speculation and is undertaken in order to eliminate an existing physical price risk, by talking a compensating position in the futures market. Speculators come to the futures market with no initial risk. They assume risk by taking futures positions. Hedgers reduce or eliminate the chance of further losses or profits, while the speculators risk losses in order to make profits. Before a staring a hedging programme it is essential to assess the risk due to exposure to the price of physical material. Once the hedger has an understanding of the tools available, it is relatively easy to select the appropriate action to manage this risk. It is important that this action is properly mange at all times and that the appropriate controls and approval procedures are in place. 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 worth a lot more than the market think. A stock picker carefully purchases securities based on a sense that they worth more than the market price. When doing so, he faces two kinds of risk s.:

1. His understanding can be wrong, and the company is really not worth more than the market price. 2. The entire market moves against him and generates loses even though the underlying idea was correct.

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Risk is an essential yet precarious element of investing. So in order to protect the value of his investment, the investor needs to reduce his w 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 w exposure to one or more kinds of risk. Every hedge has a cost, so before we decide to use hedging, we must ask our self whether the benefits received from it justify the expense. Remember, the goal of hedging isn't to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a derivative contract cannot be avoided. This is the price you have to pay to avoid uncertainty. The amount paid to buy an option is called premium. When we are comparing hedging versus insurance, we should emphasize that insurance is far more precise than hedging. With insurance, we are completely compensated for our loss. Hedging a portfolio isn't a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice. The Hedging technique Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the two most common of which are options and futures. 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 balance that investor 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. This decision includes checking whether there are instruments that address both certainty and opportunity loss. Fortunately, there are. They are called derivatives or derivative products. With the help of these instruments we can develop trading strategies where a loss in one investment is offset by a gain in a derivative. Most financial institutions make markets in panoply of risk management solutions involving derivative products. Some of them come as stand – alone solutions and others are presented a packages or combinations. Financial derivatives are used to hedge the exposure to market risk. Hedgers transfer their risk to speculators who are willing to assume the risk

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3.8

Derivatives and risk management.

This term risk management was largely emerged during the early 1990s, but the term “risk management” was used long before this. Since the 1960s, it has been – and frequently still is – used to describe techniques for addressing insurable risks. This form of “risk management “encompasses: • • • Risk reduction through safely, quality control and hazard education. Alternative risk financing including self-insurance and captive insurance The purchase of traditional insurance products, as suitable.

More recently, derivatives dealers have promoted “risk management” as the use of derivatives to hedge or customize market –risk exposures. For this reason, derivatives instruments are sometimes called “risk management products”. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another. The new “risk management” evolved during the 1990s is different from either of the earlier forms. Often called “financial risk management”, it treats derivatives as a problem as much as a solution. It focuses on reporting, oversight and segregation of duties within organizations.

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3.9

Introduction to Options

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. Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among large number of investors. They provide settlement guarantee by the Clearing Corporation thereby reducing counterparty risk. Options can be used for hedging, taking a view on the future direction of the market, for arbitrage or for implementing strategies which can help in generating income for investors under various market conditions. An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option. Options can be of two types; Call Option and Put Option Call Option A call option is a financial contract between two parties, the buyer and the seller of this type of option. It is the option to buy shares of stock at a specified time in the future. Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.

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Call options are most profitable for the buyer when the underlying instrument is moving up, making the price of the underlying instrument closer to the strike price. The call buyer believes it's likely the price of the underlying asset will rise by the exercise date. The risk is limited to the premium. The profit for the buyer can be very large, and is limited by how high underlying's spot rises. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money". The call writer does not believe the price of the underlying security is likely to rise. The writer sells the call to collect the premium. The total loss, for the call writer, can be very large indeed, and is only limited by how high the underlying's spot price rises. Put Option A put option (sometimes simply called a "put") is a financial contract between two parties, the seller (writer) and the buyer of the option. The buyer acquires a short position offering the right, but not obligation, to sell the underlying instrument at an agreed-upon price (the strike price). If the buyer exercises the right granted by the option, the seller has the obligation to purchase the underlying at the strike price. In exchange for having this option, the buyer pays the writer a fee (the option premium). A put option gives us the right to sell the underlying shares at a predetermined price called the ‘strike price’. Buying options allows us to profit from falling markets. A put option is a financial instrument like a share, which we can buy and sell in the derivatives segment of the stock market. When we buy a put option, we get the right to sell a specific quantity of the underlying shares, which the put option represents. Selling a put option, for example, when we feel that the underlying instrument’s price will remain stable or at least not fall sharply, allows us take in premium income. As the option nears expiry, the time value of our short put will be eroded and if, as we forecasted, the underlying price has not moved sharply, we will be able to close out our short put position at a cheaper premium than that at which we sold to open the position, thus realizing a profit. By buying ‘put options’ we can safely hedge ours portfolio against market downswings without selling our shares. The only price we pay is a small premium just like we do for our life insurance policies.

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OPTION TERMINOLOGY
• Index options: These options have the index as the underlying. In India, they have a European style settlement. E.g. Nifty options, Mini Nifty options etc. • Stock options: Stock options are options on individual stocks. A stock option contract gives the holder the right to buy or sell the underlying shares at the specified price. They have an American style settlement. • 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 / seller of an option: The writer / seller 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. • 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: 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.

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• 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. • European options: European options are options that can be exercised only on the expiration date itself.

3.10

Index Options

Index derivatives are derivative contracts which have the index as the underlying. The options contracts, which are based on some index, are known as Index options contract. The buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date. Like equity options, index options offer the investor an opportunity to either capitalize on an expected market move or to protect holdings in the underlying instruments. The difference is that the underlying instruments are indexes. These indexes can reflect the characteristics of either the broad equity market as a whole or specific industry sectors within the marketplace. Index options can be further classified into Put and Call options as in the case of equity option. A Put Index Option gives us the right to sell the underlying at a predetermined price called the ‘strike price’ on a predetermined future period. A Call Index Option gives us the right to buy the underlying at a predetermined price called ‘strike price’ on a predetermined future period. Buying Index Options allows us to profit from rising markets (in the case of call options) and falling markets (in the case of put options), however, the versatility of options also means that certain option strategies will enable us to profit in a static market.

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Benefits of Index Options
• Diversification

Index options enable investors to gain exposure to the market as a whole or to specific segments of the market with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stock issues or individual equity option classes, numerous decisions and transactions would be required. Employing index options can defray both the costs and complexities of doing so. • Predetermined Risk for Buyer

Unlike other investments where the risks may have no limit, index options offer a known risk to buyers. An index option buyer absolutely cannot lose more than the price of the option, the premium. • Leverage Index options can provide leverage. This means an index option buyer can pay a relatively small premium for market exposure in relation to the contract value. An investor can see large percentage gains from relatively small, favorable percentage moves in the underlying index. If the index does not move as anticipated, the buyer's risk is limited to the premium paid. However, because of this leverage, a small adverse move in the market can result in a substantial or complete loss of the buyer's premium. Writers of index options can bear substantially greater, if not unlimited, risk. • Guaranteed Contract Performance The seller or writer of the put option is obliged to buy the underlying shares at the specified price if the buyer decides to sell. When an option holder want to exercise an option depended on the ethical and financial integrity of the writer at the time of expiration of the contract the option writer can’t escape from his obligation. i.e.., the performance of the option writer is guaranteed.

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Hedging strategy

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Have portfolio, buy Puts
Owner of equity portfolios often experience discomfort about the overall stock market movement. As an investor of a portfolio, sometimes we may have a view that stock prices will fall in the near future. At other times we may see that the market is in massive volatility, and we do not have an appetite for this kind of volatility. The union budget is a common and reliable source of such volatility; market volatility is always enhanced for one week before and two week after the budget. Many investors do not want the fluctuations of these three weeks. One way to protect our portfolio from potential downside due to a market drop is to buy portfolio insurance. Index option is a cheap and easily implemental way of seeking this insurance. The idea is simple. To protect the value of portfolio from falling below a particular level, buy the right number of put options with the right strike price. When the index falls portfolio will lose value and the put options bought us will gain, effectively ensuring that the value of portfolio does not fall below a particular level. This level depends on the strike price of the options chosen by the investor. Portfolio insurance using put options is of particular interest to mutual funds who already own well-diversified portfolios. By buying puts, the fund can limit its downside in case of a market fall.

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4.1

Scope of the study

The study covers the Index Options as a hedging tool for aggressive risk management. The other hedging tools like Forward, SWAP are not covered in this study. The study is confined to “Have Portfolio, Buy Puts” strategy.

4.2

Period of the study

The study covers a period of two months, i.e. January and April. Because in the month of January the market was in a bearish trend and in the month of April market was in a bullish trend.

4.3

Data collection

Data collection was done by the researcher himself. This study was descriptive in nature and was mainly based on the secondary data. The data for analysis were collected from the journals, like Treasury Management, NSE Bulletin, and Internet sources. The data for review were collected from magazines, journals, records & reports and bulletin. In this study the primary data have limited use. The beta values were calculated by the researcher himself on the basis of available secondary data.

4.4

Framework of analysis

In this study the researcher have used the strategy” Have portfolio, Buy Put strategy”

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4.5

Design of the study

4.5.1

Selection of securities from different sectors.

The securities are selected from the different sectors in order to have the effect of diversification. Securities from different sectors are selected on the basis of Liquidity, P/E ration, good beta value and past performance. The securities selected are as follows Table No. 1 SELECTED COMPANYS AND THEIR RESPECTIVE SCRIP CODES AND INDUSTRY
NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. COMPANY BHARAT PETROLEUM CORPORATION Ltd. DLF Ltd. HINDUSTAN UNILEVER Ltd. INFOSYS TECHNOLOGIES Ltd. I T C Ltd. LARSEN & TOURBRO Ltd. MAHINDRA & MAHINDRA Ltd. STEEL AUTHORITY of INDIA Ltd STATE BANK of INDIA SUN PHARMACEUTICAL INDUSTRIES Ltd. SCRIP CODE BPCL DLF HINDUNILVR INFOSYSTCH ITC LT SAIL SBIN SUNPHARMA M&M INDUSTRY REFINERIES CONSTRUCTION DIVERSIFIED COMPUTERS – SOFTWARE CIGARETTES ENGINEERING AUTOMOBILES - 4 WHEELERS STEEL AND STEEL PRODUCTS BANKS PHARMACEUTICALS

4.5.2

Calculation of Beta value of each security.

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Beta is a measure of systematic risk. Beta describes the relationship between the stock‘s return and the index return. Hedging will have more effect when the securities which were selected have good beta value as these securities have more fluctuation from the market performance. In this research, beta values of individual securities were calculated for two different periods viz. for December 2009 and or May 2010. Beta was calculated by using the following formula β N = number of observations X= market return Y= individual securities return The security return = Today’s price – Yesterday’s price * 100 Yesterday’s price Today’s market return = Today’s index – Yesterday’s index * 100 Yesterday’s index = nΣXY- (ΣX) (ΣY) nΣX2 - (ΣX)2

4.5.3

Construction of portfolio.

Portfolio is a basket of individual securities. In this study the portfolio was created by combining the securities from different sectors on the basis that on an average Rs. 2 lakh is invested in each stock. The quantity of the individual securities in the portfolio was calculated by dividing Rs. 2 lakh with market price of the each security as on hedging day.

4.5.4

Calculation of beta of the portfolio

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The beta amount of individual scrip was calculated by multiplying the beta value of individual security with amount of money invested in the particular security. The total of beta value of individual securities is known as portfolio beta value. The division of portfolio beta value with portfolio value will provide the portfolio beta. Beta of the portfolio was calculated by using the following formula Beta of the portfolio= Portfolio Beta Amount Value of the portfolio

4.5.5

Calculation of the amount to be hedged

The product of the portfolio value and portfolio beta reveals the amount of Nifty to be hedged. In this stage the number of Nifty to be sold and number of lot to be sold were calculated. Number of Nifty to be sold was calculated by dividing the amount of Nifty to be sold with closing Nifty Index value of the day on which the hedging is done. Number of market lots to be sold was calculated dividing the number of Nifty to be sold by current market lot i.e. 50. • The amount of Nifty to be sold for the purpose of hedging was calculated by the following formula Amount of Nifty to be sold = Value of the Portfolio amount * Portfolio Beta • Number of Nifty to be sold was calculated by Number of Nifty to be sold= Amount of Nifty to be sold Closing Value of Nifty Index as on hedging day • Number of lots to be sold can be calculated by Number of lots to be sold= Number of Nifty to be sold Current Market lot 4.5.6 Hedging the portfolio using Index Put Options.

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In this stage the portfolio is hedged by using the Index Put Option. Put Option can be bought along with the Strike Price. In order to buy the Put Option an amount called premium is to be paid. This premium is different for different strike prices. The premium to be paid can be calculated by multiplying premium amount for the particular strike price with current market price and number of lots to be sold. Premium to be paid was calculated by using following formula Premium to be paid =
Premium for the particular strike price * Current market lot * Number of lot to be sold

4.6
• • • • •

Limitations of the study
The duration of the study was limited to period of two months so that the extensive and deep study could not be possible. Hedging with index options is only considered. The study is limited to 10 companies of NSE. The derivative market index in India is not full fledged. Hence the information available is limited. The study is depending mostly on the secondary.

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Analysis of Data

Analysis of Data The overall analysis and interpretation of the study is divided into three parts,

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(a) Portfolio creation (b) analysis of hedging effectiveness in bearish market (c) analysis of hedging effectiveness in bullish market. First stage shows the Portfolio creation. And the Second stage shows the analysis and interpretation of hedging effectiveness in bearish market and third stage shows the analysis and interpretation of hedging effectiveness in bullish market.

5.1

PORTFOIO CREATION

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A portfolio is created on 1st April 2009 as at that point of time the market was favorable for an investment. A portfolio of 10 securities with an investment of Rs.2000000 in total. In each Security Rs.200000 is invested. . The quantity of the individual securities in the portfolio was calculated by dividing Rs. 2 lakh with market price of the each security as on 1st April 2009 . Table No. 2 NUMBER OF SECURITIES SELECTED FROM EACH SCRIP AS ON 1ST APRIL 2009
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT SAIL SBIN SUNPHARMA M&M PRICE 364.80 177.10 236.45 1373.75 184.35 672.45 97.45 1077.45 1065.45 394.95 QUANTITY 548 1129 845 145 1084 297 2052 185 187 506 TOTAL 6978

The above table shows the calculation of number of securities in each company for the purpose of portfolio creation on 1st April 2010. The quantity of the individual securities in the portfolio was calculated by dividing Rs. 2 lakh with market price of the each security as on 1st April 2010. The total number of securities in the portfolio is 6978.

Table No.3 VALUE OF PROTFOLIO AS ON 1ST APRIL 2009

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SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT SAIL SBIN SUNPHARMA M&M

PRICE(P) 364.8 177.1 236.45 1373.75 184.35 672.45 97.45 1077.45 1065.45 394.95 TOTAL

QUANTITY(Q) 548 1129 845 145 1084 297 2052 185 187 506 6978

AMOUNT(P*Q) 199910.4 199945.9 199983.8 199800.25 199835.4 199717.65 199967.4 199328.25 199239.15 199844.7 1996782.85

It is clear from the table that the value of portfolio as on 1st April is Rs.1996782.85. It also reveals the amount of money invested in each security, number of shares in each security. Number of shares is more in the case of STATE BANK OF INDIA and less in the case of INFOSYS TECHNOLOGIES Ltd , SUN PHARMACEUTICAL INDUSTRIES Ltd., and MAHINDRA & MAHINDRA Ltd.as the price of the securities are different. If the market price of the security is more, then the number of securities for investment will be less and vice versa

5.2

Analysis of portfolio in bearish market

The month of January 2010 was a bearish market. On 4th January 2010 the market opened with a Nifty Index of 5200 and in the 29th January the Nifty Index closed in 4882.05. Chart No. 2 Fluctuation in Nifty Index in the month of January 2010
2008-2010

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This graph shows the fluctuation of Nifty Index rates in the Opening Indexes from 4th January 2010 to 29th January 2010. It is clear from the graph that the Nifty Index went down 317.95 points. This results indicates a Bearish Market in the month of January.

Table No. 4 VALUE OF PROTFOLIO AS ON 4TH JANUARY 2010

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SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P) 650.75 364.6 264.8 2612.6 253.65 1691.4 1129.85 247.6 2291.2 1507.35

QUANTITY(Q) 548 1129 845 145 1084 297 506 2052 185 187 6978

AMOUNT(P*Q) 356611 411633.4 223756 378827 274956.6 502345.8 571704.1 508075.2 423872 281874.45 3933655.55

It is clear from the table that the value of portfolio as on 4 th January is Rs.
3933655.55. It also reveals the amount of money invested in each security, number of

shares in each security

Table No. 5 VALUE OF PROTFOLIO AS ON 29TH JANUARY 2010

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SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P) 540.8 333.65 255.3 2491.75 250.15 1423.85 1017.55 214.5 2056.6 1473.05

QUANTITY(Q) 548 1129 845 145 1084 297 506 2052 185 187 6978

AMOUNT(P*Q) 296358.4 376690.85 215728.5 361303.75 271162.6 422883.45 514880.3 440154 380471 275460.35 3555093.2

This table shows that value of the portfolio as on 29th January 2010 was Rs.
3555093.2. There is reduction of prices in all the securities as compared to the price

as on 4st January.

Table No. 6 CHANGE IN PROTFOLIO VALUE WITH THE CHANGE IN NIFTY INDEX Berchmans Institute of Management Studies, Changanacherry
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INDEX PORTFOLIO DATE MOVEMENT VALUE 4-Jan-10 5200.9 3933655.55 5-Jan-10 5277.15 3971960.6 6-Jan-10 5278.15 3972958.85 7-Jan-10 5281.8 3919253.6 8-Jan-10 5264.25 3934476.55 11-Jan-10 5263.8 3953550.3 12-Jan-10 5251.1 3932088.55 13-Jan-10 5212.6 3931862.15 14-Jan-10 5234.5 3929835.1 15-Jan-10 5259.9 3897335.15 18-Jan-10 5253.65 3920063.35 19-Jan-10 5274.2 3864318.5 20-Jan-10 5226.1 3836968.35 21-Jan-10 5220.2 3765177.8 22-Jan-10 5094.15 3705822.8 25-Jan-10 5034.55 3663370.9 27-Jan-10 5008.5 3546041 28-Jan-10 4863 3553731.8 29-Jan-10 4866.15 3555093.2 The above table shows the change in portfolio value along with the change in Nifty Index for the month January 2010. The changes shows a proportional relationship between the Nifty Index and Portfolio Value

Chart No. 3 Movement of S&P CNX NIFTY in the month of January 2010

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This graph shows a declining trend, it proves that in the month of Janauary there existed a bearish trend. Chart No. 4 Change in the Portfolio Value in the month of January 2010

This graph also shows a declining trend, it proves that the bearish trend, in the month of January had a negative effected the Portfolio Value.

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Table No. 7 Profit/loss of unhedged portfolio as on 29th January 2009 Value of the portfolio as on 30th January Less: Value of the portfolio as on 1st January 3555093.2 3933655.55 LOSS -378562.35

The above table shows value of the portfolio on the beginning and on the end of the period. From this table it is clear that the closing value of the portfolio is less than the opening value. The investor who holds this unhedged portfolio will suffer a loss of Rs 378562.35

5.2.1

Analysis of hedging effectiveness

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• Assumptions There is no brokerage, plenty of liquidity in the market. Table No. 8 BETAVALUE OF SECURITIES AS ON DECEMBER 2009 No. SCRIP CODE
1 BPCL 2 DLF 3 HINDUNILVR 4 INFOSYSTCH 5 ITC 6 LT 7 M&M 8 SAIL 9 SBIN 10 SUNPHARMA

BETA β
0.4 1.59 0.35 0.68 0.6 1.25 1.12 1.38 1.17 0.54

Beta value of December 2009 is considered as, for calculating the Beta value of the securities in the Hedging month is not possible. For calculating the Beta value the details regarding the changes in the Index as well as the price variation of the securities of a whole month is needed. Beta value of December 2009 was taken from http://www.nseindia.com/

Table No.9 Berchmans Institute of Management Studies, Changanacherry
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PROTFOLIO POSITION AS ON 4TH JANUARY 2009
SCRIP CODE BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL BETA(β) 0.4 1.59 0.35 0.68 0.6 1.25 1.12 1.38 1.17 0.54 QTY(Q) 548 1129 845 145 1084 297 506 2052 185 187 6978 PRICE(P) 650.75 364.6 264.8 2612.6 253.65 1691.4 1129.85 247.6 2291.2 1507.35 AMT(P*Q) 296358.4 376690.8 5 215728.5 361303.7 5 271162.6 422883.4 5 514880.3 440154 380471 275460.3 5 3555093. 2 BETA AMT(AMT*β) 142644.4 654497.106 78314.6 257602.36 164973.96 627932.25 640308.6 701143.776 495930.24 152212.203 3915559.4 95

The above table shows the beta value, quantity, price, amount invested and beta amount of individual securities. This table also reveals the total beta value of the portfolio i.e., Rs. 3915559.495. This portfolio beta value is used for calculating the beta of the portfolio.

Portfolio Beta amount Value of the portfolio Beta of the portfolio

= =

3915559.495 3933655.55

= =

Portfolio Beta amount Value of the portfolio 3915559.495 3933655.55 .995

Beta of the portfolio (βp

)

=

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•

The amount of Nifty to be sold for the purpose of Hedging = Value of the Portfolio * Portfolio Beta

= 3933655.55* .995 = 3913987.272 • Number of Nifty to be sold for the purpose of Hedging = Amount of Nifty to be sold Closing Index as on 1st January = 3913987.272 5232.2 = 748.05 • Number of Lot to be sold = Number of Nifty to be sold Market Lot = 748.05 = 15 Lots 50 • Premium to be paid for buying Index PUT for the Strike price of 5100 Rs. 70 =

Premium for the strike price 5100 = •

Total Premium to be paid for buying Index PUT

Premium for the strike price 5100 * Number of lots to be sold * Current market lot = = 70*15*50 Rs. 52500

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Calculation of profit/ loss from the Hedged portfolio •
2010)

Return from the Hedged portfolio =

Strike Price as on the day of Hedge (4TH Jan 2010)

- Closing Value of CNX Nifty Index (29th Jan
= 237

= 5100

– 4863

• •

Gross gain

= 237 * 50*15

= Rs. 213300

Less: premium paid on Index PUT for the Strike price of 5100 = 70*15*50 = 52500

•

Net gain

= 213300

– 52500

= Rs. 160800

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Table No.10
Comparison of Profit/ Loss from Hedged & Unhedged portfolios 0n 29th January 2010

Positions Hedged Portfolio Unhedged Portfolio

Profit/ Loss Rs. 160800 (Profit) Rs. 378562.35 (Loss)

The above comparison reveals that in the bearish market the unhedged portfolio gives a loss of Rs. 378562.35. This table also explains that hedged portfolio gives a profit of Rs. 160800. From this comparison it can be concluded that even in a bearish market the hedged portfolio holder can earn a profit. Chart No. 5 Comparison of profit/ loss from Hedged & Unhedged portfolios

This graph show that hedged portfolio gives a positive return i.e. profit and unhedged portfolio gives a negative returns i.e. loss. It also reveals that with the help of hedging the investor can make profit even in the bearish market otherwise he will have loss. So it can be concluded that hedging help to minimize the loss of the portfolio and also help to make profit even in the bearish market. Berchmans Institute of Management Studies, Changanacherry 72

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5.3

Analysis of portfolio in bullish market

The month of June 2010 was a bullish market. On 1st June 2010 the market opened with a Nifty Index of 5086.25 and in the 30th June the Nifty Index closed in 5312.50. Chart No. 6 Fluctuation in Nifty Index in the month of June 2010

This graph shows the fluctuation of Nifty Index rates in the Opening Indexes from 1th June 2010 to 30th June 2010. It is clear from the graph that the Nifty Index went up 226.25 points. This results indicates a Bullish Market in the month of June.

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Table No.11 NUMBER OF SECURITIES AND ITS PRICE AS ON 1ST JUNE 2010 SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT SAIL SBIN SUNPHARMA M&M PRICE(P) 576.65 270.9 233.8 2624.35 283 1593.6 198.6 2209.65 1680.9 567.4 TOTAL QUANTITY(Q) 548 1129 845 145 1084 297 2052 185 187 1012 7484

It is clear from the above table that the number of securities in the portfolio had increased from 6978 to 7484, there had been an increase of 506 shares. This happened because the number of securities of MAHINDRA &MAHINDRA Ltd. In the portfolio had doubled from 506 to 1012, it is due to the stock split that happened in 29th March. At this time the face value of the share was reduced from Rs.10 to Rs.5. The closing share price on 28th March 2010 was Rs 1078.78 and on 29th March 2010 opening price was Rs. 546.2.

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Table No.12 VALUE OF PROTFOLIO AS ON 1ST JUNE 2010 SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA PRICE(P) 576.65 270.9 233.8 2624.35 283 1593.6 567.4 198.6 2209.65 1680.9 TOTAL QUANTITY(Q) 548 1129 845 145 1084 297 1012 2052 185 187 7484 AMOUNT(P*Q) 316004.2 305846.1 197764 380530.75 306772 473299.2 574208.8 407527.2 408785.25 314328.3 3685065.8

It is clear from the table that the value of portfolio as on 1st June is Rs.1996782.85. It also reveals the amount of money invested in each security, number of shares in each security

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Table No. 13 VALUE OF PROTFOLIO AS ON 30TH JUNE 2010 SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 360025.04 322250.47 224144.7 406000 328018.4 535488.03 629271.72 402663.96 425514.8 331607.1 3964984.2

656.98 548 285.43 1129 265.26 845 2800 145 302.6 1084 1802.99 297 621.81 1012 196.23 2052 2300.08 185 1773.3 187 7484

This table shows that value of the portfolio as on 30th June 2010 was Rs. 3964984.2. There is increase of prices in all the securities as compared to the price as on 1 st June, except for Steel Authority of India Ltd , the price of the share got reduced from Rs.198.6 to Rs. 196.23.

Table No. 14 Berchmans Institute of Management Studies, Changanacherry
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CHANGE IN PROTFOLIO VALUE WITH THE CHANGE IN NIFTY INDEX
Date 1-Jun-10 2-Jun-10 3-Jun-10 4-Jun-10 7-Jun-10 8-Jun-10 9-Jun-10 10-Jun-10 11-Jun-10 14-Jun-10 15-Jun-10 16-Jun-10 17-Jun-10 18-Jun-10 21-Jun-10 22-Jun-10 23-Jun-10 24-Jun-10 25-Jun-10 28-Jun-10 29-Jun-10 30-Jun-10 INDEX PORTFOLIO MOVEMENTENT VALUE 5086.25 3684862.8 5019.85 3724555.5 5110.5 3783789.75 5135.5 3813304.75 5034 3729133.2 4987.1 3686816.4 5000.3 3690255.5 5078.6 3750193.7 5119.35 3758502.4 5197.7 3823282.95 5222.35 3827422.1 5233.35 3848863.95 5274.85 3875034.35 5262.6 3868366.75 5353.3 3938517.35 5316.55 3932045.95 5323.15 3940015.1 5320.6 3952224.4 5269.05 3922041.95 5333.5 3968840.9 5256.15 3921552.55 5312.5 3978195.85

The above table shows the change in portfolio value along with the change in Nifty Index for the month June 2010. The changes shows a proportional relationship between the Nifty Index and Portfolio Value

Chart No. 7 Movement of S&P CNX NIFTY in the month of June 2010

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This graph shows a upward trend, it proves that in the month of June there existed a bullish trend. Chart No. 8 Change in the Portfolio Value in the month of January 2010

This graph also shows a upward trend, it proves that the bullish trend, in the month of June had positively affected the Portfolio Value.

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Table No. 14 Profit/loss of unhedged portfolio as on 30th June 2010 Value of the portfolio as on 30th January 3964984.2 st Less: Value of the portfolio as on 1 January 3685065.8 PROFIT 279918.4 The above table shows value of the portfolio on the beginning and on the end of the period. From this table it is clear that the closing value of the portfolio is less than the opening value. The investor who holds this unhedged portfolio will get a profit of Rs 279918.4

5.3.1
•

Analysis of hedging effectiveness
Assumptions
2008-2010

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There is no brokerage, plenty of liquidity in the market. Table No. 15 BETAVALUE OF SECURITIES AS ON MAY 2010 No. SCRIP CODE 1 BPCL 2 DLF 3 HINDUNILVR 4 INFOSYSTCH 5 ITC 6 LT 7 M&M 8 SAIL 9 SBIN 10 SUNPHARMA BETA β 0.25 1.74 0.43 0.65 0.67 1.1 1.22 1.38 1.13 0.33

Beta value of May 2010 is considered as, for calculating the Beta value of the securities in the Hedging month is not possible. For calculating the Beta value the details regarding the changes in the Index as well as the price variation of the securities of a whole month is needed. Beta value of May 2010 was taken from http://www.nseindia.com/

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Table No.16 PROTFOLIO POSITION AS ON 1TH JUNE 2010
SCRIP CODE BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL BETA BETA(β) QTY(Q) PRICE(P) AMT(P*Q) AMT(AMT*β) 0.25 79001.05 548 576.65 316004.2 1.74 1129 270.9 305846.1 532172.2 0.43 84951.23 845 233.8 197764 0.65 145 2624.35 380530.75 247345 0.67 205537.2 1084 283 306772 1.1 297 1593.6 473299.2 520629.1 497183.2 1.22 1012 567.4 574208.8 1.38 2052 198.6 407527.2 564123.6 1.13 355191 185 2209.65 408785.25 0.33 187 1680.9 314328.3 189488.9 3275623 7484 3685065.8

The above table shows the beta value, quantity, price, amount invested and beta amount of individual securities. This table also reveals the total beta value of the portfolio i.e., Rs. 3275623. This portfolio beta value is used for calculating the beta of the portfolio. Portfolio Beta amount Value of the portfolio Beta of the portfolio = =
3275623 3685065.8

= =

Portfolio Beta amount Value of the portfolio
3275623 3685065.8

Beta of the portfolio (βp

)

=

.888

•

The amount of Nifty to be sold for the purpose of Hedging = Value of the Portfolio * Portfolio Beta
2008-2010

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= 3685065.8* .888 = 3272338.4304 • Number of Nifty to be sold for the purpose of Hedging = Amount of Nifty to be sold Closing Index as on 1st January = 3272338.4304 4970 = 658.41 • Number of Lot to be sold = Number of Nifty to be sold Market Lot = 658.41 = 13 Lots 50 • Premium to be paid for buying Index PUT for the Strike price of 4900 Rs. 120 =

Premium for the strike price 4900 = •

Total Premium to be paid for buying Index PUT

Premium for the strike price 4900 * Number of lots to be sold * Current market lot = = 120*13*50 Rs. 78000

Calculation of profit/ loss from the Hedged portfolio

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•
2010)

Return from the Hedged portfolio =

Strike Price as on the day of Hedge (1TH Jun 2010)

- Closing Value of CNX Nifty Index (30th Jun
= -412

= 4900

– 5312

•

The closing value of the CNX Nifty Index is more than the Strike Price so the investor can make use of the portfolio profit. Then the only loss is the amount of premium paid for buying the Put Index Option.

• •

Profit from the portfolio = 279918.4 Less: premium paid on Index PUT for the Strike price of 4900 = 120*13*50 = 78000

•

Net gain

= 279918.4

– 78000

= Rs. 201918.4

Table No.17

Berchmans Institute of Management Studies, Changanacherry

2008-2010

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Comparison of profit/ loss from Hedged & Unhedged portfolios as on 30 th JUNE 2010 Positions Hedged Portfolio Unhedged Portfolio Profit/ Loss 201918.4( Profit) 279918.4 (Profit)

The above table reveals that the hedged portfolio gives a lesser profit than the unhedged one. Profit from the hedged portfolio was Rs. 201918.4 and profit from unhedged portfolio was Rs. 279918.4. Chart No. 9 Comparison of profit/ loss from Hedged & Unhedged portfolios

From this graph it is clear that the return from the unhedged portfolio is higher that the hedged one. So it can be concluded that in the rising market the profit which can be earned from hedged portfolio will always less than the unhedged one as the investor have to pay premium for buying the put option.

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Findings

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2008-2010

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6.1 Findings Based on the research work the following things have been found out by the researcher. • With the help of hedging the investor can reduce the risk of portfolio. hedging even in the bearish market the

The study reveals that with the help of

investors are in a position to get profit. During the research it was found out that the Hedging does not always make profit. The best that can be achieved using hedging is the reduction of unwanted exposure. i.e., unnecessary risk. • In the bullish market Put Option is less effective.

Put Option is the right to sell the underlying at a certain price in future. If the market is in a bullish trend the investor can exercise this right only at a lesser price than the current market price. If he exercises this right it will be a lesser profit than the usual portfolio. • The investor can sell the Call Option when the Index falls.

If the market is in a bullish trend the investor who holds a Put Option can sell the Put option to any other party. In this way the investor can get back the premium paid by him. • In the case of bearish market Put Option is more effective. This study reveals that in a bearish market Put Option gives a profit otherwise it will be a loss. The investor who holds a Put Option can make use of the portfolio profit when the market is in bullish trend.

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6.2 Suggestions An investor can make a combination of cash market and derivatives to minimize loss and maximize profits. The various suggestions about investment in the cash market and derivatives are listed below. These suggestions are strictly based on the analysis done. • • • Higher the beta value higher will be the risk, in this context hedging suggested. Options protect the portfolio by paying small premium amount. Put option is more effective in bearish market. If the market is in a bullish trend, the Put Option holder can sell the right to another party. • At the time of bullish trend in Index Call Option is more effective. If the market is in a bearish trend the Call Option holder can sell the right to another party. • Speculation helps the investor to gain at the time bearish and bullish Index

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6.3

Conclusion.

Developments in derivative markets are still in a nascent stage and there is a great scope for further developments. But there are serious doubts about stable developments as Indian markets are still very narrow, shallow and rely more on the mercy of manipulators and speculators. In order to achieve good derivative market operations regulators and exchanges in consultation with market participants should come up with necessary regulatory changes which are friendly to all. Apart from this, what is more required is that the players should have a strong financial base to deal in derivative contracts, proper capital adequacy norms, training of financial intermediaries and brokers. Well developed indices are some other areas which need attention. International experiences have popularized these products. India has just began its voyage in the derivative arena and one hope that it will out perform the other markets in the years to come. Even though derivative market is relatively new in our country, it is attracting many investors. The result of derivative trading is fantastic because of a simple reason; it is flexible. The flexibility of derivatives can be learnt from the fact that the investors who need to hedge their funds can use it and also the investors who want to increase returns can use it.

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BIBLIOGRAPHY
Books • • • Fisher E Donld and Jordan J Ronald, “Security Analysis and Portfolio Management” Prentice Hall India Pvt. Ltd., New Delhi, 6th edition. Kevin S, “Portfolio Management” Prentice Hall India Pvt. Ltd., New Delhi, 7th edition. Pandey I.M, “Financial Management”, Vikas Publication House, New Delhi, 2004 • Pandian Punithavathy, “Security Analysis and Portfolio Management” Vikas Publishing House Pvt. Ltd., New Delhi, 2nd edition, 2000. Business Dailies • • Economic Times, May-July 20010 Business Line, May-July 20010

Websites • • • • • www.capitaline.com www.bseindia.com www.nseindia.com www.equitymaster.com/portfolio/index.asp www.equitymaster.com/detail.asp

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Portfolio as on 4th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
650.75 364.6 264.8 2612.6 253.65 1691.4 1129.85 247.6 2291.2 1507.35

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 356611 411633.4 223756 378827 274956.6 502345.8 571704.1 508075.2 423872 281874.45 3933655.55

Portfolio as on 5th January 2010
SCRIP
BPCL

PRICE(P)
640.95

QUANTITY(Q) AMOUNT(P*Q)
548 351240.6

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2008-2010

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COCHIN STOCK EXCHANGE LTD DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL 369.45 264.7 2621.35 256.15 1694.4 1150.65 254.55 2292.05 1552.65 1129 845 145 1084 297 506 2052 185 187 6978 417109.05 223671.5 380095.75 277666.6 503236.8 582228.9 522336.6 424029.25 290345.55 3971960.6

Portfolio as on 6th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
631.3 378 263.8 2583.1 256.75 1675.65 1178.85 248.35 2305.8 1572.8

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 345952.4 426762 222911 374549.5 278317 497668.05 596498.1 509614.2 426573 294113.6 3972958.85

Portfolio as on 7th January 2010
SCRIP
BPCL DLF

PRICE(P)
619.05 374.5

QUANTITY(Q) AMOUNT(P*Q)
548 1129 339239.4 422810.5

Berchmans Institute of Management Studies, Changanacherry

2008-2010

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COCHIN STOCK EXCHANGE LTD HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL 265 2525.05 255.95 1667.6 1155.8 241.6 2292.9 1548.85 845 145 1084 297 506 2052 185 187 6978 223925 366132.25 277449.8 495277.2 584834.8 495763.2 424186.5 289634.95 3919253.6

Portfolio as on 8th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
629.55 389.9 264 2464.2 256.5 1678.15 1155.9 238.85 2286.05 1574.95

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 344993.4 440197.1 223080 357309 278046 498410.55 584885.4 490120.2 422919.25 294515.65 3934476.55

Portfolio as on 11th January 2010
SCRIP
BPCL DLF HINDUNILVR

PRICE(P)
627.9 399.45 265

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 344089.2 450979.05 223925

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2008-2010

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COCHIN STOCK EXCHANGE LTD INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL 2489.65 256.6 1677.3 1159.2 242.1 2267.2 1574.7 145 1084 297 506 2052 185 187 6978 360999.25 278154.4 498158.1 586555.2 496789.2 419432 294468.9 3953550.3

Portfolio as on 12th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
627.55 383.95 266 2586.95 250.05 1679.25 1192.2 234.05 2203.2 1571.8

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 343897.4 433479.55 224770 375107.75 271054.2 498737.25 603253.2 480270.6 407592 293926.6 3932088.55

Portfolio as on 13th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH

PRICE(P)
629.8 387.85 262.1 2683.5

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 345130.4 437882.65 221474.5 389107.5 2008-2010

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COCHIN STOCK EXCHANGE LTD ITC LT M&M SAIL SBIN SUNPHARMA TOTAL 248.95 1673.2 1153.6 241.6 2175.9 1547.8 1084 297 506 2052 185 187 6978 269861.8 496940.4 583721.6 495763.2 402541.5 289438.6 3931862.15

Portfolio as on 14th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
625.8 383.3 262.5 2689.75 248.15 1668.4 1171.65 240.85 2157.35 1559.5

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 342938.4 432745.7 221812.5 390013.75 268994.6 495514.8 592854.9 494224.2 399109.75 291626.5 3929835.1

Portfolio as on 15th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC

PRICE(P)
617.35 386.3 256 2675.8 252.75

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 338307.8 436132.7 216320 387991 273981

Berchmans Institute of Management Studies, Changanacherry

2008-2010

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COCHIN STOCK EXCHANGE LTD LT M&M SAIL SBIN SUNPHARMA TOTAL 1651.2 1157.2 237.3 2143.35 1525.1 297 506 2052 185 187 6978 490406.4 585543.2 486939.6 396519.75 285193.7 3897335.15

Portfolio as on 18th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
618.4 397.3 256.4 2686.65 250.55 1654.75 1183.65 234.85 2156.4 1516.45

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 338883.2 448551.7 216658 389564.25 271596.2 491460.75 598926.9 481912.2 398934 283576.15 3920063.35

Portfolio as on 19th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC

PRICE(P)
605.6 379.7 257 2635.9 249.9

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 331868.8 428681.3 217165 382205.5 270891.6

Berchmans Institute of Management Studies, Changanacherry

2008-2010

95

COCHIN STOCK EXCHANGE LTD LT M&M SAIL SBIN SUNPHARMA TOTAL 1642.5 1159.6 233.45 2173.1 1485.9 297 506 2052 185 187 6978 487822.5 586757.6 479039.4 402023.5 277863.3 3864318.5

Portfolio as on 20th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
577.5 373.7 255.4 2657.7 247.1 1635.95 1145.45 238.3 2159.85 1473.35

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 316470 421907.3 215813 385366.5 267856.4 485877.15 579597.7 488991.6 399572.25 275516.45 3836968.35

Portfolio as on 21st January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC

PRICE(P)
573.25 363.55 257.8 2625.2 244.5

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 314141 410447.95 217841 380654 265038 2008-2010

Berchmans Institute of Management Studies, Changanacherry

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COCHIN STOCK EXCHANGE LTD LT M&M SAIL SBIN SUNPHARMA TOTAL 1524.1 1144.85 233.05 2124.1 1464.85 297 506 2052 185 187 6978 452657.7 579294.1 478218.6 392958.5 273926.95 3765177.8

Portfolio as on 22nd January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
575.75 352.75 256 2575.6 253.65 1471.7 1133.1 225.6 2087.35 1432

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 315511 398254.75 216320 373462 274956.6 437094.9 573348.6 462931.2 386159.75 267784 3705822.8

Portfolio as on 25th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT

PRICE(P)
569.7 344.15 257 2542.3 255.1 1490.45

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 312195.6 388545.35 217165 368633.5 276528.4 442663.65 2008-2010

Berchmans Institute of Management Studies, Changanacherry

97

COCHIN STOCK EXCHANGE LTD M&M SAIL SBIN SUNPHARMA TOTAL 1071.25 223.45 2091.6 1444.5 506 2052 185 187 6978 542052.5 458519.4 386946 270121.5 3663370.9

Portfolio as on 27th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
554.45 317.15 263.9 2502.25 255.9 1458.05 1010.9 215.85 1987.65 1421

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 303838.6 358062.35 222995.5 362826.25 277395.6 433040.85 511515.4 442924.2 367715.25 265727 3546041

Portfolio as on 28th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT

PRICE(P)
542.5 324.3 259.3 2502.25 254.25 1431.5

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 297290 366134.7 219108.5 362826.25 275607 425155.5

Berchmans Institute of Management Studies, Changanacherry

2008-2010

98

COCHIN STOCK EXCHANGE LTD M&M SAIL SBIN SUNPHARMA TOTAL 1022.3 218.95 2003.25 1446.2 506 2052 185 187 6978 517283.8 449285.4 370601.25 270439.4 3553731.8

Portfolio as on 29th January 2010
SCRIP
BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL

PRICE(P)
540.8 333.65 255.3 2491.75 250.15 1423.85 1017.55 214.5 2056.6 1473.05

QUANTITY(Q) AMOUNT(P*Q)
548 1129 845 145 1084 297 506 2052 185 187 6978 296358.4 376690.85 215728.5 361303.75 271162.6 422883.45 514880.3 440154 380471 275460.35 3555093.2

Berchmans Institute of Management Studies, Changanacherry

2008-2010

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COCHIN STOCK EXCHANGE LTD

Portfolio as on 1st June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 576.65 548 316004.2 270.9 1129 305846.1 233.8 845 197561 2624.35 283 1593.6 567.4 198.6 2209.65 1680.9 145 1084 297 1012 2052 185 187 7484 380530.75 306772 473299.2 574208.8 407527.2 408785.25 314328.3 3684862.8

Portfolio as on 2nd June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 575.45 548 315346.6 273.2 1129 308442.8 237.75 845 200898.75 2640.25 281.3 1631.55 574.55 201.6 2258.25 145 1084 297 1012 2052 185 382836.25 304929.2 484570.35 581444.6 413683.2 417776.25

Berchmans Institute of Management Studies, Changanacherry

2008-2010

100

COCHIN STOCK EXCHANGE LTD

SUNPHARMA TOTAL

1682.5

187 7484

314627.5 3724555.5

Portfolio as on 3rd June 2010 SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 579.9 548 317785.2 278.35 1129 314257.15 247.05 845 208757.25 2698 285.5 1666.75 582.95 202.6 2287.3 1702.9 145 1084 297 1012 2052 185 187 7484 391210 309482 495024.75 589945.4 415735.2 423150.5 318442.3 3783789.75

Portfolio as on 4th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 579.8 548 317730.4 281.75 1129 318095.75 251.7 845 212686.5 2728.95 290.85 1672 585.2 201.35 2340.75 1704.8 145 1084 297 1012 2052 185 187
2008-2010

395697.75 315281.4 496584 592222.4 413170.2 433038.75 318797.6 101

Berchmans Institute of Management Studies, Changanacherry

COCHIN STOCK EXCHANGE LTD

TOTAL

7484

3813304.75

Portfolio as on 7th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 563.5 548 308798 263.9 1129 297943.1 251.05 845 212137.25 2671.65 287.7 1640.2 580.25 193.35 2286.75 1694.35 145 1084 297 1012 2052 185 187 7484 387389.25 311866.8 487139.4 587213 396754.2 423048.75 316843.45 3729133.2

Portfolio as on 8th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 543.75 548 297975 257.3 1129 290491.7 251.4 845 212433 2654.5 289.7 1627.4 570.75 189.1 2283.8 1687.2 145 1084 297 1012 2052 185 187 7484 384902.5 314034.8 483337.8 577599 388033.2 422503 315506.4 3686816.4

Berchmans Institute of Management Studies, Changanacherry

2008-2010

102

COCHIN STOCK EXCHANGE LTD

Portfolio as on 9th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 552.75 548 302907 258.2 1129 291507.8 249.55 845 210869.75 2624.95 277.6 1642.75 578.35 192.2 2272.5 1686.85 145 1084 297 1012 2052 185 187 7484 380617.75 300918.4 487896.75 585290.2 394394.4 420412.5 315440.95 3690255.5

Portfolio as on 10th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL Berchmans Institute of Management Studies, Changanacherry PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 551 548 301948 262.75 1129 296644.75 252 845 212940 145 1084 297 1012 2052 185 187 7484
2008-2010

2645.55 280.05 1672.4 592.75 197.9 2326.85 1702.45

383604.75 303574.2 496702.8 599863 406090.8 430467.25 318358.15 3750193.7 103

COCHIN STOCK EXCHANGE LTD

Portfolio as on 11th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 541 548 296468 262.4 1129 296249.6 252.75 845 213573.75 145 1084 297 1012 2052 185 187 7484 381458.75 305200.2 498083.85 613980.4 405988.2 432881.5 314618.15 3758502.4

2630.75 281.55 1677.05 606.7 197.85 2339.9 1682.45

Portfolio as on 14th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 563.15 548 308606.2 264.4 1129 298507.6 255.45 845 215855.25 2746.4 145 398228 286.1 1703.9 615.7 200.15 2345 1702 1084 297 1012 2052 185 187 7484 310132.4 506058.3 623088.4 410707.8 433825 318274 3823282.95

Berchmans Institute of Management Studies, Changanacherry

2008-2010

104

COCHIN STOCK EXCHANGE LTD

Portfolio as on 15th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 530.6 548 290768.8 272.5 1129 307652.5 260.15 845 219826.75 2734.7 291.7 1724.45 608.15 201.4 2364.2 1701.5 145 1084 297 1012 2052 185 187 7484 396531.5 316202.8 512161.65 615447.8 413272.8 437377 318180.5 3827422.1

Portfolio as on 16th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 534.3 548 292796.4 277.55 1129 313353.95 255.9 845 216235.5 2769.4 290.9 1721.2 629.3 197.95 2361.7 1702.8 145 1084 297 1012 2052 185 187 7484 401563 315335.6 511196.4 636851.6 406193.4 436914.5 318423.6 3848863.95

Berchmans Institute of Management Studies, Changanacherry

2008-2010

105

COCHIN STOCK EXCHANGE LTD

Portfolio as on 17th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 535.4 548 293399.2 283 1129 319507 253 845 213785 2764.85 293.9 1777 634.7 197.95 2350.85 1698.75 145 1084 297 1012 2052 185 187 7484 400903.25 318587.6 527769 642316.4 406193.4 434907.25 317666.25 3875034.35

Portfolio as on 18th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 521.7 548 285891.6 282.65 1129 319111.85 257.75 845 217798.75 2786.2 145 403999 294.9 1798.5 619.2 195.8 2372.6 1713.35 1084 297 1012 2052 185 187 7484 319671.6 534154.5 626630.4 401781.6 438931 320396.45 3868366.75

Berchmans Institute of Management Studies, Changanacherry

2008-2010

106

COCHIN STOCK EXCHANGE LTD

Portfolio as on 21st June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 526.55 548 288549.4 290.15 1129 327579.35 258.75 845 218643.75 2800.8 145 406116 299.1 1084 324224.4 1836.35 297 545395.95 636.95 1012 644593.4 201.55 2052 413580.6 2387.8 185 441743 1754.5 187 328091.5 7484 3938517.35

Portfolio as on 22nd June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 550.15 548 301482.2 288.25 1129 325434.25 261.75 845 221178.75 2767.1 145 401229.5 301.8 1825.15 633.15 198.7 2354.55 1761.65 1084 297 1012 2052 185 187 7484 327151.2 542069.55 640747.8 407732.4 435591.75 329428.55 3932045.95

Berchmans Institute of Management Studies, Changanacherry

2008-2010

107

COCHIN STOCK EXCHANGE LTD

Portfolio as on 23rd June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 558.8 548 306222.4 291.8 1129 329442.2 266.2 845 224939 2797.75 145 405673.75 302.85 1765.05 630.9 200.6 2349.55 1799.25 1084 297 1012 2052 185 187 7484 328289.4 524219.85 638470.8 411631.2 434666.75 336459.75 3940015.1

Portfolio as on 24th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 550.75 548 301811 289.2 1129 326506.8 270.9 845 228910.5 2822.7 305.75 1791.65 632.05 198.8 2357.55 1809.8 145 1084 297 1012 2052 185 187 7484 409291.5 331433 532120.05 639634.6 407937.6 436146.75 338432.6 3952224.4

Berchmans Institute of Management Studies, Changanacherry

2008-2010

108

COCHIN STOCK EXCHANGE LTD

Portfolio as on 25th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 620.7 548 340143.6 286.15 1129 323063.35 266.25 845 224981.25 2777.7 301.45 1759.1 613.35 195.25 2300.8 1790.65 145 1084 297 1012 2052 185 187 7484 402766.5 326771.8 522452.7 620710.2 400653 425648 334851.55 3922041.95

Portfolio as on 28th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA TOTAL PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 642.5 548 352090 291.75 1129 329385.75 266.75 845 225403.75 2809 297.65 1792.9 622.85 198.9 2303.65 1790.75 145 1084 297 1012 2052 185 187 7484 407305 322652.6 532491.3 630324.2 408142.8 426175.25 334870.25 3968840.9

Berchmans Institute of Management Studies, Changanacherry

2008-2010

109

COCHIN STOCK EXCHANGE LTD

Portfolio as on 29th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 635.25 548 348117 285.25 1129 322047.25 262.65 845 221939.25 2793.55 145 405064.75 296.35 1084 321243.4 1796.8 297 533649.6 613.9 1012 621266.8 192.9 2052 395830.8 2291.15 185 423862.75 1756.85 187 328530.95 TOTAL 7484 3921552.55

Portfolio as on 30th June 2010
SCRIP BPCL DLF HINDUNILVR INFOSYSTCH ITC LT M&M SAIL SBIN SUNPHARMA PRICE(P) QUANTITY(Q) AMOUNT(P*Q) 662.75 548 363187 288.65 1129 325885.85 267.55 845 226079.75 2791 145 404695 305.45 1084 331107.8 1808.95 297 537258.15 627.35 1012 634878.2 192.7 2052 395420.4 2302 185 425870 1785.1 187 333813.7 TOTAL 7484 3978195.85

Berchmans Institute of Management Studies, Changanacherry

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110