Investore Prefrences Towards Investment In Derivative Products

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02 Nov 2017

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Human being enters the world with a raw brain and mind. Until he works out with his imagination, he cannot reach the soaring heights of success. Study of management will be worthwhile only if it is coupled with the practical studies and imagination power.

"Knowledge is the ocean that cannot be fathomed the deeper you go, the more you see its unbounded profundity"

Change in occurring at an accelerated rate. Today is not like yesterday and tomorrow will not like be today’s market is how to succeed in the dynamic environment that surrounds the corporate world. MBA one of those professional courses which help students to keep pace the changing trends in business and its surrounding environment.

The subject ‘Practical Studies’ particularly helps students to know the actual corporate world, the anxieties and stress associated with the job which cannot be understood sitting in a classroom. So MBA is not just to enable me to focus firmly on the current trend but also helped to focus on future changes.

As students of MBA we are required to do a survey in any particular unit or particular sector of national or international, so as to gain practical knowledge about the prevailing market condition, for this purpose, we have chosen "INVESTORES PREFRENCES TOWARDS INVESTMENT IN DERIVATIVE PRODUCTS. "And done over report on that.

ACKNOWLEDGMENT

Today, we take opportunity to thank all the people who helped us to get the necessary information regarding the industry we visited. We are very glad to present this report to you.

First of all, I would like to impart my sincere thanks toMURTHY SIRwho gave me permission to make project on "INVESTORES PREFRENCES TOWARDS INVESTMENT IN DERIVATIVE PRODUCTS."At last but not the least, I am thankful to my project guide Mr.Pinakin Jaiswal for his support.

Date:-

Place: - VADODARA.

Signature,

EXECUTIVE SUMMARY

The introductory part of the project is focused on theoretical framework &the second half of the project is Research work based on the analysis of questionnaire which is based on the topic,"INVESTORES PREFRENCES TOWARDS INVESTMENT IN DERIVATIVE PRODUCTS."

The theoretical framework include the meaning of Derivatives, history of Indian Derivatives operation, working, types of Derivatives, nature ofDerivatives, advantages & disadvantages of mutual fund.

we haveused the convenience sampling method in the research activity. The hundred samples were taken into consideration. Samples were collected from different walks of the life, which includes businessmen, service-class person, student, professionals etc.

The researcher has done research work by using the survey method. Wehave done research work by using questionnaire & personal interview. We have used primary data for the research work. The questionnaire are of closed-ended and open-ended i.e. objective type questionnaire has used in the research work.

The analysis of questionnaire has done by using tables, graphs, analytical method. We have know things that majority are aware about,Derivatives generally senior citizen are not investing in, INDerivatives market investors get information through Referrals, through broker tips is more popular in market, majority people are preferred to invest in stock future, stock index future, currency derivatives,

During research we found that majority investor are not much aware,Derivatives markets some investor due to safe mode of investment, investor are interested to improve their current knowledge about theDerivatives, majority are preferred using hedging, speculation During research my suggestion is the investor are depending on the others for the investment, if some-one less knowledge about Derivativesmarket so that she can enter through theDerivatives. Due to full safety,

We hope that all the suggestions and findings might prove important and helpful to all who want to invest in Mutual Fund.

Table of Content

Sr. No.

Particulars

Page No.

Part-I

Chap. – 1

Preface

3

Chap. – 2

Acknowledgement

4

Chap. – 3

Declaration

5

Chap. – 4

Executive Summery

6

Part- II

Chap. – 5

Industry Overview

10

Chap. – 6

HistoryOfDerivatives

14

Chap. – 7

Instruments Derivative

27

Chap. – 8

Traders in derivatives market

38

Chap. – 9

Problem Statements

42

Chap. – 10

Literature Review

43

Chap. – 11

Research Objectives

46

Chap. – 12

Research Methodology

47

Chap. – 14

Data Analysis

55

Chap. – 14

Research Hypothesis

71

Chap. – 15

Limitation Of The Study

77

Chap. – 16

Findings

78

Chap. – 17

Suggestions

79

Chap. – 18

Conclusion

80

Chap. – 19

Bibliography

81

Chap. – 20

Annexure

82

INTRODUCTION

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INDUSTRY OVERVIEW

Indian Securities Market

Introduction:-

Securities market has essentially three categories of participants, namely the issuer of securities, investors in securities and the intermediaries and two categories of products, namely the services of the intermediaries, the securities including derivatives.

The securities market has two interdependent and inseparable segments, the new issues (primary market) and the stock (secondary market). The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued.

History:-

1850 – Shares of banks and securities of East India Company traded in Mumbai under a sprawling banyan tree in front of Town Hall, which is now in the Harriman Circle Park.

1875 – Brokers organized an association known as the Native Share Brokers Association, and the country’s first stock exchange the Bombay Stock Exchange (BSE), set up in Mumbai with 318 members. The membership fee gradually increased from Re 1 in 1887 to Rs 1,000 in 1896, and Rs 48,000 in 1920.

1956 – Securities Contract Regulation Act passed

1957 – The BSE and eight other stock exchanges registered under the Securities Trading Contract Act.

1982 – The BSE classifies scripts into Group A for carry forward, and Group B for cash transactions.

1986 – The BSE 30-share Sensitivity Index (a.k.a. the Sense) compiled; updated every two minutes.

1987 – Stock Holding Corporation of India set up.

1992 – Ordinance promulgated for granting statutory powers to the SEBI. The Over-The-Counter Exchange of India begins operations. The National Stock Exchange incorporated. The new 9,000-sq. ft ring in the rotunda of the new annexed to JeejeebhoyTowers inaugurated.

1994 – The NSE’s debt segment begins operations on June 30; and the capital market segment begins on-line script less trading on November 3.

1995 – The BSE computerizes its trading operations, signaling the end of 120 years of floor-trading with open out-cry system of share-trading and the beginning of screen-based trading on the BSE.

1996 – NSE 50 index launched April 22. NSDL set up as the first depository in India, and the NSE commences trading in dematerialized securities on December 26.2000 – The SEBI approves the report on net trading brought out by the SEBI committee on Net based trading and services. Pursuant to the circular, stock exchanges are required to give permission to members to start Net-based trading after ensuring fulfillment of the minimum conditions. The NSE is the first exchange to grant provisional permission to Cochin-based Geojit Securities to commence Net-based trading.

Stock Broking Scenario in India:-

Growth of Stock Broking:-

Capital markets all over the world are witnessing major changes. With escalating interests of domestic and international players in India, there is an increasing demand for a more systematic approach. SEBI is also trying to bring transparency in the dealings. Economic growth and liberalization has opened number of opportunities in various organizations like mutual funds, investment consultancy, broker firms, insurance companies, merchant banks, pension funds and other financial institutions. Foreign institutional investors, mutual funds and even individuals have once again started posing confidence in the capital markets. This has enhanced prospects for brokers, investment and equity analysts.

They can also start their own consultancies. Stock exchanges to some extent play an important role as indicators, reflecting the performance of the country’s economic state of health. There are three main factors behind the changes in the stock-broking business. First, the shift from floor-based to screen based trading in 1994. This brought transparency into trade execution and raised the confidence of investors. The result has been lower transaction charges and increased convenience. This has helped both the investors and the brokers. The second change was dematerialization. Before this, buying or selling shares was a difficult matter. Even when an investor bought shares, he was not sure whether they would be transferred in his name. But now these concerns are no longer there. The introduction of futures and options was the third major factor that has changed the face of the stock broking business, as it is a new avenue for revenue

DEVELOPMENT:-

An important early event in the development of the stock market in India was the formation of the Native Share and Stock Brokers’ Association at Bombay in 1875, the precursor of the present-day Bombay Stock Exchange. This was followed by the formation of associations /exchanges in Ahmedabad (1894), Calcutta (1908), and Madras (1937). IN addition, a large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times subsequently.

In order to check such aberrations and promote a more orderly development of the stock market, the central government introduced a legislation called the Securities Contracts (Regulation) Act, 1956. Under this legislation, it is mandatory on the part of stock exchanges to seek government recognition. As of January 2002 there were 23 stock exchanges recognized by the central Government. They are located at Ahmadabad, Bangalore, Baroda, Bhubaneswar, Calcutta, Chennai,(the Madras stock Exchanges ), Cochin, Coimbatore, Delhi, Guwahati, Hyderbad, Indore, Jaipur, Kanpur, Ludhiana, Mangalore, Mumbai(the National Stock Exchange or NSE), Mumbai (The Stock Exchange), popularly called the Bombay Stock Exchange, Mumbai (OTC Exchange of India), Mumbai (The Inter-connected Stock Exchange of India), Patna, Pune, and Rajkot. Of course, the principle bourses are the National Stock Exchange and The Bombay Stock Exchange, accounting for the bulk of the business done on the Indian stock market.

HISTORY OF DERIVATIVES:-

With the opening of the economy to multinationals and the adoption of the liberalized economic policies, the economy is driven more towards the free market economy. The complex nature of financial structuring itself involves the utilization of multi currency transactions. It exposes the clients, particularly corporate clients to various risks such as exchange rate risk, interest rate risk, economic risk and political risk.

With the integration of the financial markets and free mobility of capital, risks also multiplied. For instance, when countries adopt floating exchange rates, they have to face risks due to fluctuations in the exchange rates. Deregulation of interest rate cause interest risks. Again, securitization has brought with it the risk of default or counter party risk. Apart from it, every asset—whether commodity or metal or share or currency—is subject to depreciation in its value. It may be due to certain inherent factors and external factors like the market condition, Government’s policy, economic and political condition prevailing in the country and so on.

In the present state of the economy, there is an imperative need of the corporate clients to protect their operating profits by shifting some of the uncontrollable financial risks to those who are able to bear and manage them. Thus, risk management becomes a must for survival since there is a high volatility in the present financial markets.

In this context, derivatives occupy an important place as risk reducing machinery. Derivatives are useful to reduce many of the risks discussed above. In fact, the financial service companies can play a very dynamic role in dealing with such risks. They can ensure that the above risks are hedged by using derivatives like forwards, future, options, swaps etc. Derivatives, thus, enable the clients to transfer their financial risks to the financial service companies. This really protects the clients from unforeseen risks and helps them to get there due operating profits or to keep the project well within the budget costs. To hedge the various risks that one faces in the financial market today, derivatives are absolutely essential.

HISTORY OF INDIAN DERIVATIVE MARKET:-

The derivatives markets has existed for centuries as a result of the need for both users and producers of natural resources to hedge against price fluctuations in the underlying commodities. India has been trading derivatives contracts in silver, gold, spices, coffee, cotton and oil etc for decades in the gray market. Trading derivatives contracts in organized market was legal before Korari Desai’s government banned forward contracts. Derivatives on stocks were traded in the form of "Teji" and "Mandi" in unorganized markets. Recently futures contract in various commodities was allowed to trade on exchanges. In June 2000, NSE and BSE started trading in futures on Sensex and Nifty. Options trading on Sensex and Nifty commenced in June 2001. Very soon thereafter trading began on options and futures in 31 prominent stocks in the month of July and November respectively. The market lots keeps onchanging from time to time. The minimum quantity you can trade in is one market lot.

ALL ABOUT INDIA'S DERIVATIVES MARKETS:-

Everyone talks about derivatives these days. Derivative products have been around for a long time. Do you know derivatives first came about in Japanese rice markets? Yes, as early as the 1650s, dealings resembling present day derivative market transactions were seen in rice markets in Osaka, Japan The first leap towards an organized derivatives market came in 1848, when the Chicago Board of Trade, the largest derivative exchange in the world, was established.

Today, equity and commodity derivative markets are rapidly gaining in size in India. In terms of popularity too, these markets are catching on like a forest fire. So, what are these markets all about? What are the products that they trade in? Why do people feel the need to trade in such products and what sort of traders benefit from such trades? Do these markets hold scope for retail investors too? And if so, how exactly can you go about trading in them? Derivatives markets broadly can be classified into two categories, those that are traded on the exchange and the traded one to one or 'over the counter'. They are hence known as

Exchange Traded Derivatives

OTC Derivatives (Over The Counter)

OTC Equity Derivatives

Traditionally equity derivatives have a long history in India in the OTC market.

Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai

The SCRA however banned all kind of options in 1956.

The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI.

The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products.

Besides the Forward market in currencies has been a vibrant market in India for several decades.The terms "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, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.

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

With the amendment in the definition of 'securities' under SC(R)A (to include derivative contracts in the definition of securities), derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.

Dr. L.C Gupta Committee constituted by Sebi had laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lays down the provisions for trading and settlement of derivative contracts.

The Rules, Bye-laws & Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. Sebi has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House.

The eligibility conditions have been framed to ensure that Derivative exchange/Segment & Clearing Corporation/House provide a transparent trading environment, safety & integrity and provide facilities for redressed of investor grievances.

Derivatives: AN Indian Context:-

In Indian context, the intensity of derivatives usage by institutional investors (viz. Banks, Financial Institution; Mutual Funds, Foreign Institutional Investors, Life and General Insurers) depend on their ability and willingness to use derivatives for one or more of the following purposes:

Risk containment: using derivatives for hedging and risk containment purposes

Risk Trading/Market Making: Running derivatives trading book for profits and arbitrage; and/or

Covered Intermediation: On-balance-sheet derivatives intermediation for client transaction, without retaining any net-risk on the balance sheet (except credit risks).

WHAT IS DERIVATIVE?

A derivatives instrument broadly is a financial contract whose payoff structure is determined by the value of an underlying commodity, security, interest rate, share price index, exchange rate, oil price and the kike. Thus, a derivative instrument derives its value from some underlying variable. A derivative instrument by itself does not constitute ownership. It is, instead, a promise to convey ownership.

"A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps."

A derivative is a product whose value is derived from the value of an underlying asset, index or reference rate. The underlying asset can be equity, forex, commodity or any other asset. For example, if the settlement price of a derivative is based on the stock price of a stock for e.g. Infosys, which frequently changes on a daily basis, then the derivative risks are also changing on a daily basis. This means that derivative risks and positions must be monitored constantly.

All derivatives are based on some ‘cash’ products. The underlying basis of derivative instrument may be any product including

Commodities including grain, coffee beans, orange juice etc.

Precious metals like gold and silver

Foreign exchange rate

Bonds of different types, including medium to long- term negotiable debt securities issued by government, companies, etc.

Short-term debt securities such as T-bills; and

Over-the-counter (OTC) money market products such as loans or deposits.

Derivatives are specialized contracts which are employed for a variety of purposes including reduction of funding costs by borrowers, enhancing the yield on assets, modifying the payment structure of assets to correspond to the investors market view, etc. As awareness about the usefulness of derivatives as a risk management tool has increased, the markets for derivatives too have grown. Of late, derivatives have assumed a very significant place in the field of finance and they seem to be driving global financial markets.

Derivatives have made the international and financial headlines in the past for mostly with their association with spectacular losses or institutional collapses. But market players have traded derivatives successfully for centuries and the daily international turnover in derivatives trading runs into billions of dollars.

However the most important use of derivatives is in transferring market risk, called hedging, which is a protection against losses resulting from unforeseen price or volatility changes. Thus, derivatives are very important tool of risk management.

A derivative instrument is a financial instrument or other contract

It has (1) one or more underlying, and (2) one or more notional amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements. and in some cases, whether or not a settlement is required.

Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement

It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.

Exchange-Traded and Over-the-Counter Derivative Instruments:-

OTC (over-the-counter) contracts, such as forwards and swaps, are bilaterally negotiated between two parties. The terms of an OTC contract are flexible, and are often customized to fit the specific requirements of the user. OTC contracts have substantial credit risk, which is the risk that the counterparty that owes money defaults on the payment. In India, OTC derivatives are generally prohibited with some exceptions: those that are specifically allowed by the Reserve Bank of India (RBI) or, in the case of commodities (which are regulated by the Forward Markets Commission), those that trade informally in "havala" or forwards markets.

An exchange-traded contract, such as a futures contract, has a standardized format that specifies the underlying asset to be delivered, the size of the contract, and the logistics of delivery. They trade on organized exchanges with prices determined by the interaction of many buyers and sellers. In India, two exchanges offer derivatives trading: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). However, NSE now accounts for virtually all exchange-traded derivatives in India, accounting for more than 99% of volume in 2003-2004. Contract performance is guaranteed by a clearinghouse, which is a wholly owned subsidiary of the NSE.4 Margin requirements and daily marking-to-market of futures positions substantially reduce the credit risk of exchange-traded contracts, relative to OTC contracts.

THE MAIN INSTRUMENTS UNDER THE DERIVATIVE ARE:-

Derivative as a term conjures up visions of complex numeric calculations, speculative dealings and comes across as an instrument which is the prerogative of a few ‘smart finance professionals’. In reality it is not so. In fact, a derivative transaction helps cover risk, which would arise on the trading of securities on which the derivative is based and a small investor can benefit immensely. "A derivative security can be defined as a security whose value depends on the values of other underlying variables." Very often, the variables underlying the derivative securities are the prices of traded securities.

DERIVATIVES

Options

Futures

Swaps

Forwards

Commodity

Security

Interest Rate

Currency

Put

Call

THE MAIN INSTRUMENTS UNDER THE DERIVATIVE ARE:-

FUTURE CONTRACT:-

Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash.

One way in which future contract is different from a forward contract is an exact delivery date is not specified. The contract is referred to by its delivery month, and the exchange specifies the period during the month when delivery must be made.

FORWARD CONTRACT:-

A forward is a contract to buy a thing or security at a prefixed future date. The typical usage of a forward would be something like this: a business having its assets in a local currency has taken a loan repayable in a foreign currency 6 months hence. There is an exchange rate risk here: if the local currency suffers against the foreign currency, the business has to write a loss. To cover against this risk, the business enters into a forward contract - that is, it agrees today to buy the foreign currency 6 months hence at prices prevailing today, against a pre-fixed premium. Obviously, if the perceptions of the seller and the buyer as to future prices of the foreign currency differ, both will strike what they perceive is a win-win deal.

One of the parties to forward contract assumes a long position and agrees to buy the underlying asset on a specified time and future date for a certain specified price. The other party assumes a position and agrees to sell the asset on the same date for the same price. The specified price in a forward contract will be referred to as delivery price. The forward contract is settled at maturity. The holder of the short position delivers the asset to the holder price. A forward contract is worth zero when it is first entered into. Later it can have position or negative value, depending on movements in the price of the asset.

Difference between the Forward and Futures:-

DIFFERCENCE BETWEEN FORWARD AND FUTURES CONTRACT

DIFFERCENCE

FORWARDS

Counterparty risk

Present

Price of contract

Remains fixed till maturity

Mark to market

Not done

Size of contract

Decided by buyer and seller

Margin

No margin required

Liquidity

No liquidity

Nature of Market

Over the counter

Mode of delivery

Specifically decided.

OPTIONSCONTRACT:-

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchase the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.

An option is a contract, which gives the buyer the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date). The underlying may be commodities like wheat/rice/cotton/gold/oil/ or financial instruments like equity stocks/ stock index/bonds etc.

TYPES OF OPTIONS

Call Options:-

A Call Options an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability.

Call options usually increase in value as the value of the underlying instrument rises. When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.

Call options give the taker the right, but not the obligation, to buy the underlying shares at a predetermined price, on or before a predetermined date.

Put Options:-

Put Options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases. If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.

With a Put Option, you can "insure" a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level. If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium.

This is the primary function of listed options, to allow investors ways to manage risk. Technically, an option is a contract between two parties. The buyer receives a privilege for which he pays a premium. The seller accepts an obligation for which he receives a fee.

A Put Option gives the holder of the right to sell a specific number of shares of an agreed security at a fixed price for a period of time

Overview:-

CALL OPTION BUYER

CALL OPTION WRITER (Seller)

Pay premium

Profit from rising prices

Limited loss, potentially unlimited gain

Right to exercised call and buy a share

Receives premium

Has Obligation to sell share if option is exercised

Profit from fall in a price or remaining neutral

Potentially unlimited loss, limited gain

PUT OPTION BUYER

PUT OPTION WRITER (Seller)

Pay premium

Right to exercised option and sell share

Profits from fall in a price

Limited loss, Potentially unlimited gain

Receives premium

Profit from rise in price or remains neutral

Potentially unlimited loss, limited gain Obligation to buy share if exercised

SWAPS:-

Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. Contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a ‘SWAP’. In case of swap, only the payment flows are exchanged and not the principle amount. The two commonly used swaps are:

Currency swaps:

Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. Under currency swap, cash flows to be exchanged are determined at the spot rate at time when swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates.

Interest rate swaps:

Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract.

Financial swap:

Financial swaps constitute a funding technique which permit a borrower to access one market and then exchange the liability for another type of liability. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream.

DEVELOPMENT OF DERIVATIVES MARKET IN INDIA:-

Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the world’s largest futures industries. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created.

In the equity markets, a system of trading called "badla" involving some elements of forwards trading had been in existence for decades.6 However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation (i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R) A, was amended so that derivatives could be declared "securities." This allowed the regulatory framework for trading securities to be extended to derivatives. The Act considers derivatives to be legal and valid, but only if they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in 1999.

.

The trading in BSESensex options commenced on June 4, 2001 and the trading in options n individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSC 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. The index future and options contract on NSC are based on S&P CNX.

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.

TRADERS IN DERIVATIVES MARKET:-

Hedgers

Hedgers are the traders who wish to eliminate the risk (of price change) to which they are already exposed. They may take a long position on, or short sell, a commodity and would, therefore, stand to lose should the prices move in the adverse direction. The trader can sell futures (or forward) contracts with a matching price, to hedge. Thus, if the wheat prices do fall, that trader would lose money on the inventory of wheat but will profit from the futures contract, which would balance the loss.

It may be noted that hedging only makes an outcome more certain, it does not necessarily lead to an improved outcome.

We have seen how one can take a view on the market with the help of index futures. The other benefit of trading in index futures is to hedge your portfolio against the risk of trading.

Illustration: Ramesh enters into a contract with Haresh that six months from now he will sell to Haresh 10 dresses for Rs 3000. The cost of manufacturing for Ramesh is only Rs 1000 and he will make a profit of Rs 2000 if the sale is completed.

Cost (Rs)

Selling price

Profit

1000

3000

2000

However, Ramesh fears that Haresh may not honor his contract 6 months from now. So he inserts a new clause in the contract that if Haresh fails to honor the contract he will have to pay a penalty of Rs 1000. And if Haresh honors the contract Ramesh will offer a discount of Rs 1000 as incentive.

Haresh defaults

Haresh honors

1000 (Initial Investment)

2000 (Initial profit)

1000 (penalty from Shyam)

(-1000) discount given to Shyam

- (No gain/loss)

1000 (Net gain)

As we see above if Haresh defaults Ramesh will get a penalty of Rs 1000 but he will recover his initial investment. If Haresh honors the contract, Ram will still make a profit of Rs 1000. Thus, Ramesh has hedged his risk against default and protected his initial investment.

Speculators:-

If hedgers are the people who wish to avoid the price risk, speculators are those who are willing to take such risk. These are the people who take position in the market and assume risks to profit from fluctuations in prices. In fact, the speculators consume information, make forecasts about the prices and put their money in these forecasts. Depending on their perceptions, they may take long or short positions on futures and/or options, or may hold spread positions (simultaneous long and short positions on the same derivatives).

Speculators are those who do not have any position on which they enter in futures and options market. They only have a particular view on the market, stock, commodity etc. In short, speculators put their money at risk in the hope of profiting from an anticipated price change. They consider various factors such as demand supply, market positions, open interests, economic fundamentals and other data to take their positions.

Arbitrageurs:-

Arbitrageurs thrive on market imperfections. An arbitrageur profits by trading a given commodity, or other item, that sells for different prices in different markets.

Simultaneous purchase of securities in one market where the price thereof is low and sale thereof in another market, where the price thereof is comparatively higher. There are done when the same securities are being quoted at different prices in the two markets, with a view to make a profit and carried on which the conceived intention to derive advantage from difference in prices of securities prevailing in the two markets.

An arbitrageur is basically risk averse. He enters into those contracts were he can earn risk less profits. When markets are imperfect, buying in one market and simultaneously selling in other market gives risk less profit.

PROBLEM STATEMENTS

"INVESTORE PREFRENCES TOWARDS INVESTMENT IN DERIVATIVE PRODUCTS."

Investor’s knowledge of derivatives market and Investor invest in derivatives market since how many years.

Investor awareness of Derivatives market.

What is Investor’s perception on Derivatives market and reason behind investment in Derivatives market?

LITERATURE REVIEW

Review of Derivatives Research

Editors-in-Chief: G. Bakshi; D.B. Madan

ISSN: 1380-6645 (print version)

ISSN: 1573-7144 (electronic version)

Journal no. 11147

"The proliferation of derivative assets during the past two decades is unprecedented. With this growth in derivatives comes the need for financial institutions, institutional investors, and corporations to use sophisticated quantitative techniques to take full advantage of the spectrum of these new financial instruments. Academic research has significantly contributed to our understanding of derivative assets and markets. The growth of derivative asset markets has been accompanied by a commensurate growth in the volume of scientific research."

Customer Reviews :-Commodity Derivatives: Markets and Applications (The Wiley Finance Series)

This review is from: Commodity Derivatives: Markets and Applications (The Wiley Finance Series)

"This book is a nice overview of over-the-counter traded products in the Energy and Commodity markets. This book is organized like a Wall St primer, it starts with the overview of the particular market fundamentals and then gives examples of some derivatives related to the specific market. Unlike most books on derivatives this book is not very quantitative, but provides a good intro to the growing world of Energy and Commodity derivatives."

The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management,

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 came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously both in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives, futures adoptions on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linkedderivatives.

Even small investors find these useful due to high correlation of the popular indices with various portfolios and ease of use. The lower costs associated with index derivatives vis-vis derivative products based on individual securities is another reason for their growing use. As in the present scenario, Derivative Trading is fast gaining momentum, I have chosen this topic.

View the full version of this book online

x

RESEARCH OBJECTIVES

Main objective:

To know the investment pattern toward derivatives

To know how derivatives are used by investors. Whether they take derivatives as risk adverse instrument or as risky instrument.

To know the investment habit of the people of Vadodara City.

To know the reason behind lacking of derivatives market comparing with equity market

Subsidiary objective:

To know the future of derivatives in India

To know the purpose of investing in Derivative market

To find out the best pattern to educate about Derivatives market

To know the reason behind not investing in derivatives

RESEARCH METHODOLOGY

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RESEARCH DESIGN

Definition of research:

When you say that you are undertaking a research study to find answers to a question,

You are implying that the process;

1. Is being undertaken within a framework of a set of philosophies (approaches);

2. uses procedures, methods and techniques that have been tested for theirvalidity and reliability;

3. Is designed to be unbiased and objective.

Characteristics of Research:-

Controlled

Rigorous (Strictness or Harshness)

Empirical

Critical

Systematic

Valid and Verifiable

Types of Research

Research can be classified from three perspectives:

1. Application of research study

2. Objectives in undertaking the research

3. Inquiry mode employed

Objectives of Research

From the viewpoint of objectives, a research can be classified as,

Descriptive

Co- relational

Explanatory

Exploratory

The Research Process

Steps for the process:

1. Formulating the Research Problem

2. Extensive Literature Review

3. Developing the objectives

4. Preparing the Research Design including Sample Design

5. Collecting the Data

6. Analysis of Data

7. Generalization and Interpretation

8. Preparation of the Report or Presentation of Results-Formal write ups of conclusions reached.

Null Hypothesis (h0):

"The null hypothesis is a particular type of simple statistical hypothesis which has been developed by statisticians. The essentialcharacteristic is that it can be evaluated in terms of a probability given certain assumptions are met.

E.g. p (obtaining a sample of ten sports students with an average strength rating of 10. given that the population average is 12) =0.75"

The above definition is vague because you need to be aware of, and understand Probability DensityFunctions, inferential statistics, sampling distributions, and the 'statistical test' to fully appreciate what anull hypothesis is.

Alternative Hypothesis (h1):

This is the logical opposite to the null hypothesis. For example, if the null hypothesis states there are norelationship between height and weight the alternative hypothesis states that there is. Similarly, if thenull hypothesis states that the estimated population means for two groups is the same the alternativehypothesis states that they are not.

The alternative hypothesis is therefore usually composite and is the equivalent to the research orscientific hypothesis.

SOURCES OF DATA

There are two main sources of data

Primary Data

Secondary Data

Primary Data:-

The data, which is collected directly from the respondent to the base of knowledge and belief of the research, is called primary data.

So far as my research is concerned, primary data is the main source of information. We have collected data through Questionnaire and information from respondent.

Secondary Data:-

The sources of secondary data areperiodicals, books, published documents, journals, reports, internet, newspapers, etc. As the data from the secondary sources help me to decide what needs to be done.

SCOPE OF STUDY

It’s very difficult to do the research with the whole universe. As we know that it is not feasible to go for population survey because of the numerous customers and their scattered location. So for this purpose sample size has to be determined well in advance and selection of sample also must be scientific so that it represents the whole universe.

So far as our research is concerned, we have taken sample size of 100 respondents. We have selected Income Earners with savings to invest in derivative market.

All the respondents are stratified on the basis of their profession and savings. It is a conveying sample research.

Sample universe

Vadodara city

Sampling Technique

Convenience

Sample size

100 respondent

SAMPLING DESIGN

Sampling in educational research is generally conducted in order to permit the detailed study of part, rather than the whole, of a population. The information derived from the resulting sample is customarily employed to develop useful generalizations about the population.

These generalizations may be in the form of estimates of one or more characteristics associated with the population, or they may be concerned with estimates of the strength of relationships between characteristics within the population.

Surveys, on the other hand, are strong with respect to external validity because they are concerned with the question of whether the findings obtained for the subjects in the survey may be generalized to a wider population.

Provided that scientific sampling procedures are used, the select ion of a sample often provides m any advantages compared with a complete coverage of the population

Sampling design is one of the most important aspects. So in that Sample design we have to look that whatever figure we take that can give truly and fact figure. So where the design must be appropriate in order to have the desired result. Sampling design includes various aspect and they are as follows:

Sample Size:-

100 Respondents

DATA COLLECTION INSTRUMENT

Instrument:-

Data Source : Primary data& Secondary Data

Research Method : Survey Method

Questionnaires (Structured / Unstructured):-

Research Technique: Questionnaire

Type of questions: Structured

Type of question: Open and close ended

No. of question: 12

DATA COLLECTION METHOD:-

We have used the survey method to collect the primary data. A survey can be done in many ways such as questionnaire method, those person investing in derivatives market, and person know the derivative market and investor opinion.

DATA ANALYSIS AND INTERPARATION

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DATA ANALYSIS AND INTERPARATION

AGE

Age

Less than 20

21-30

31-40

41-60

No. of responses

18

32

30

20

AGE

ANALYSIS:-

- 18% of the people are less than 20

- 32% of the people are 21-30 age

- 30% of the people are 31-40 age

- 20% of the people are 41-60 age

From the above table show the maximum people of 21-30 age are investor and less number investor of 40-60 age in Vadodara city as per our data analysis and market survey based on questionnaire.

QUALIFICATION

Answer

Under graduate

Graduate

Post graduate

Other

No. of responses

17

35

40

8

QUALIFICATION

ANALYSIS:-

17% of the people is under graduate

35% of the people are graduate complete

40% of the people are post graduate complete

8% of the people is other

For the above table shows the maximum investor are post-graduation because reason behind that their analysis of market. And less number of other in including farmer, workerinvestor because there have not full knowledge of marketin the vadodara city as per our data analysis and market survey based on questionnaire.

OCCUPATION

Answer

Professional

Business man

Govt. Employee

Student

Pvt. Employee

Other

No. of responses

11

23

10

19

30

7

OCCUPATION

ANALYSIS:-

11% of the people have professional

23% of the people have business man

10% of the people have Govt.employee

19% of the people student

30% of the people have Private. Employee

7% of the people is other

The above table shows that maximum people of having private jobshave a fully knowledge of market. Also business men have knowledge of the market.Less number of investor is other in the Vadodaracity as per our data analysis and market survey based on questionnaire.

ANNULA INCOME

Answer

100000-250000

250001-500000

500001-1000000

1000001 and above

No. ofresponses

28

27

24

21

ANNULA INCOME

ANALYSIS:-

28% of the people Income is Rs.100000-250000

27% of the people Income is Rs.250001-500000

24% of the people Income is Rs.250001-1000000

21% of the people Income is Rs.100000 and above

The above table shows that maximum people income is in 100000-250000 that includesmiddle class people and Above 1000000 income is consider business man in the vadodara city as per our data analysis and market survey based on questionnaire.

what is the proportion of investment from your income invested in derivative market ?

Answer

NO

< 10%

10% to 20%

20% to 30%

>30%

No. of responses

20

25

21

20

15

INVESTMENT

ANALYSIS:-

25% of the people is invest < 10%

20% of the people is not invest

11% of the people is invest 10% to 20%

20% of the people is invest 20% to 30%

15% of the people is Invest> 30%

The above table shows that maximum people invest in derivative market are less 10% of their investment. there are less people that invest not more than 10%-20% and 20% respondent are not investing in derivative market in vadodara city as per our data analysis and market survey based on questionnaire

Which broking house do you deal with?

Answer

Angel broking

Share khan

IIFL

ICICI

kotak

Other

No. of responses

25

17

25

15

25

2

BROKING HOUSE

ANALYSIS:-

25% of the people deal with angel broking

17% of the people deal with sharekhan

25% of the people deal with IIFL

15% of the people deal with ICICI

25% of the people deal with kotak

2% of the people deal with other broking houses

From the above table shows the maximum people deal with angel broking, IIFL, kotakreason is may be this are more facility given by them to the other or and less number of people is deal with other broking houses in the vadodara city as per our data analysis and market survey based on questionnaire.

3) Since last how much period you are dealing in derivative market?

Answer

<1 year

1to 3 years

3to 5 year

>5 years

No. of response

10

29

47

14

ANALYSIS:-

29% of the people is dealing in derivative market last 1 to 3 year

57% of the people is dealing in derivative market last 3 to 5 year

14% of the people is dealingin derivative market last 5 year

From the above table showed the maximum 57% people is dealingin derivative market since 3 to 5 year .reason is derivative not traded since many year and less number of people is dealing in derivatives that 15% from last 5 years.

4)INWhich of the following derivative instruments do you deal ?

Answer

stock futures

stock Index futures

stock Option

stock Index Option

Currency F & O

Commodity F & O

No. Of response

17

15

10

15

21

22

DEAL IN DERIVATIVE INSTRUMENTS

ANALYSIS:-

17% of the people is dealing in stock futures

15% of the people is dealing in stock Index futures

10% of the people is dealing in stock Option

15% of the people is dealing in stock Index Option

21% of the people is dealing in Currency F & O

22% of the people is dealing in Commodity F & O

From the above table shows the maximum people dealing in stock futures and stock index futures and now days incommodity and currency many investor are invest.Less number of people are invest in stock option because option is very difficult to invest this are the reason behind it.

5) What is the main reason for dealing in derivatives?

Answer

Hedging

Speculation

Arbitraging

No. of response

15

40

45

MAIN REASON FOR DEALING IN DERIVATIVE

ANALYSIS:-

15% of the people is main reason Hedging

40% of the people is main reason Speculation

45% of the people is main reason Arbitraging

From the above data shows the maximum people are 45% use derivative for arbitrage in derivative market.Reason is arbitrager use topurchase at low price and sell at higher price so profit is taken so people are using arbitraging andpeople also use speculation. Because of speculationis high risky and gives high return.Less number people are using ashedging because to get perfect hedge is very difficulty so less people using hedging the in vadodara city as per our data analysis and market survey based on questionnaire.

6) Give rank according to Liquidity preference of following derivative instruments.

Answer

stock futures

stock Index futures

commodity

currency

stock option

stock index option

No. responses

23

20

18

16

12

11

ANALYSIS:-

23% of the people give the first rank of stock futures

20% of the people give the second rank of stock Index futures

18% of the people give the third rank of commodity

16% of the people give the four rank of currency

12% of the people give the fifth rank of stock option

11% of the people give the six rank of stock index option

From the above table maximum people give the 1st rank is stock future reason is people know the stock market and less number of people knowstockindexoption and knowledge of option but commodity and currency have a fast growth. And investor have a more knowledge of commodity n currency so more invest in commodity as well as currency in vadodara city as per data analysis and market survey by questionnaire.

7) On Which basis are you dealing with derivatives market?

Answer

on analysis

Tips

media

broker

derivative strategy

Other

No. response

20

15

17

28

8

12

ANALYSIS:-

23% of the people is dealing in derivative market on analysis basis

15% of the people is dealing in derivative market on tips

17% of the people is dealing in derivative market on media

25% of the people is dealing in derivative market on broker

8% of the people is dealing in derivative market on derivative strategy

12% of the people is dealing in derivative market another

From the above data shows the maximum people are broker basis is using and less number of people is using derivative strategy and some people is using other basis like friend relative so this are basis in the Vadodara city as per over data analysis and market survey based on questionnaire.

8) What is your opinion regarding the awareness level about Derivatives?

Answer

Very high

High

Moderate

Low

Very low

No. Of Response

9

21

30

25

15

AWARENESS LEVEL ABOUT DERIVATIVES

ANALYSIS:-

9% of the people awareness level is Very high

21% of the people awareness level is High

30% of the people awareness level is Moderate

25% of the people awareness level is Low

15% of the people awareness level is Very low

From the above table show the maximum people are awareness is moderate derivative market minimum people are aware about derivative market in Rajkot city as per over data analysis and market survey based on questioners

9) Which kind of risk taker you are?

Answer

high risk

moderate risk

low risk

No. Of response

20

45

35

RISK TAKER

ANALYSIS:-

20% of the people is high risk taker

45% of the people is moderate risk taker

35%of the people is low risk taker

From the above table show the maximum people are moderate risk and low risk taker and minimum people is high risk taker in vadodara city as per over data analysis and market survey based on questionnaire.

10) Which benefit you find in derivatives compared to equity?

Answer

Risk control

Liquidity

Risk hedging

Varieties of proudest

No. Of response

20

30

35

15

BENEFIT IN DERIVATIVES COMPARED TO EUUITY

ANALYSIS:-

20% of the people his say to derivatives is Risk control compared to equity

30% of the the people his say to derivatives is Liquidity compared to equity

35% of the the people his say to derivatives is Risk hedging compared to equity

15% of the the people his say to derivatives is Varieties of products compared to equity

The table show the maximum people say to derivative is Liquidity compared to equity and minimum people say to derivatives is many varieties of products compared to equity market in Vadodara city as per our data analysis and market survey based on questionnaire.

11) From your point of view are derivatives more risky than equity market ?

Answer

Yes

No

No. of response

60

40

DERIVATIVES MORE RISKY THAN EQUITY MARKET

ANALYSIS:-

60% of the people say to derivatives more risky than equity market

40% of the people say to derivatives less risky than equity market

From the above table show the maximum people say thatderivative aremore risky than equity market and minimum people say to derivative market is less risky than equity market so derivative market more risky than equity market as per data analysis.

HYPOTHESIS TESTING

Q.1 Annual Income

Q.2 Which kind of risk taker you are?

Annual Income/ Risk

High risk

Moderate risk

Low risk

Total

100000-250000

7

12

9

28

250001-500000

8

11

8

27

500001-1000000

10

8

6

24

1000001 and above

5

7

9

21

Total

30

38

32

100

Solution:-

HYPOTHESIZE:-

STEP 1:- Ho: Risk taking ability is not dependent on annual Income of respondent

Ha: Risk taking ability is dependent on annual Income of respondent

TEST:-

STEP 2:- this appropriate statistical test is

X2=∑(fo-fe)

fe

STEP 3:- the appropriative type 1 error rate =0.05

STEP 4:- the degrees of freedom are (r-1) (c-1) = (4-1) (3-1) =6 and the critical value in X2 0.05, 6=12.5916

STEP 5 :-VALUE

Annual Income/ Risk

High risk

Mode



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