Summer Internship Program 2013 Intrim Project Report on

Derivative Markets in India: Trading, Pricing, Risk Management, Future Outlook & Investors Perception.

By, AVINASH KUMAR SINGH (Enrolment No. : - 12BSP1658) Unicon Securities Pvt. Ltd. A report submitted in partial fulfilment of the requirements of PGPM Program of IBS Gurgaon Submitted to, Faculty Guide:Prof. Bhavna Chhabra Company Guide:Mr. Gaurav Jain

1|P a ge

TABLE OF CONTENTS:SL.NO 1. 2. SUMMARY

INTRODUCTION:I. The Company:a) Introduction to the company, b) Mission c) Vision II. III. IV. V. VI. Literature Review Research Gap Introduction to research Why Derivative Market? The Problem Statement

Topics

Page No. 3 4 to 12 4 to 5

6 to 7 7 8 8 to 9 9 to 10

a) Defining The Problem b) Defining The Hypothesis VII. VIII. IX. X. XI. Scope Of The Project Importance Of The project Objective Of The Project Research Methodology Assumptions

10 10 to 11 11 11 to 12 12 13 to 19 20 to 21

3. 4.

DATA COLLECTED FROM SECONDARY SOURCES:DATA COLLECTED FROM PRIMARY SOURCES

2|P a ge

SUMMARY:New ideas and innovations have always been the hallmark of progress made by mankind. At every stage of development, there have been two core factors that drive man to ideas and innovation. These are increasing returns and reducing risk, in all facets of life. The financial markets are no different. The endeavour has always been to maximize returns and minimize risk. A lot of innovation goes into developing financial products centred on these two factors. It brings us into a whole new era of financial innovation. Derivatives are among the forefront of the innovations in the financial markets and aim to increase returns and reduce risk. They provide an outlet for investors to protect themselves from the vagaries of the financial markets. These instruments have been very popular with investors throughout the world. Indian financial markets have been on the ascension and catching up with global standards in financial markets. The advent of screen based trading, dematerialization, rolling settlement has put our markets on par with international markets. As a logical step to the above progress, derivative trading was introduced in the country in June 2000. Starting with index futures, we have made rapid strides and have four types of derivative products- Index future, index option, stock future and stock options. This market presents a tremendous opportunity for individual investors .The markets have performed smoothly over the last two years and has stabilized. The time is ripe for investors to make full use of the advantage offered by this market. With little bit of knowledge and careful watch, one can make fortunes in this market. Such astounding features and still small traders fears to go inside, what is the reason, this project will to try to cover some untouched and interesting solutions to it. Depository participant firms, one of the most important entity in the entire capital market, they are so essential for the market that one cannot even think of trading if they were not present. The project will try to shed some lights upon few of the aspects of Depository participant and Investors relation their support and requirement for each other. If the project would help you in any way, the purpose of the project will get fulfilled then only.

3|P a ge

INTRODUCTION:1) The company:- Unicon Securities Pvt. Ltd. A. Introduction to the Company:UNICON is a financial services company which has emerged as a one-stop investment solutions provider. It was founded in 2004 by two visionary and hardworking entrepreneurs, Mr. Gajendra Nagpal and Mr. Ram M. Gupta, who possess expertise in the field of Finance. The company is headquartered in New Delhi, and has its Corporate office in Mumbai with regional offices in Kolkata, Chennai, Hyderabad and Noida UNICON is a professionally managed company led by a team with outstanding managerial acumen and cumulative experience of more than 400 man years in the financial markets The Company is supported by more than 2400 Uniconians and has an extensive network of over 323 business offices in 152 cities across India. With a customer base of over 200,000 the Unicon Group has an eye for the intricate financial needs of its clients and caters to both their short term and long term financial needs through a comprehensive bouquet of investment services. It has been founded with the aim of providing world class investing experience to the investing community. These services range from offline & online trading in equity, commodities and currency derivatives to debt markets to corporate finance and portfolio management services. The company has a sizable presence in the distribution of 3rd party financial products like mutual funds, insurance products and property broking. It also provides expert Advisory on Life Insurance, General Insurance, Mutual Funds and IPOs. The distribution network is backed by in-house back office support to provide prompt and efficient customer service The Equity broking arm UNICON Securities Pvt. Ltd offers personalized premium services on the NSE, BSE & Derivatives market. The Commodity broking arm Unicon Commodities Pvt. Ltd offers services in Commodity trading on NCDEX and MCX. The UNICON group also has a PCG division providing investments solutions for High Net Worth Individuals. The Corporate Advisory Services arm Unicon Capital Services (P) Ltd offers entire gamut of Investment Banking services to corporates. UNICON can boast of some of the most respected names in the private equity space like Sequoia Capitals, Nexus India Capital and Subhkam Ventures as its shareholders.
4|P a ge

B. Mission of the company:

Unicons mission is to protect and promote the wealth of all its stakeholders by providing trustworthy, best in class financial products and services.

C. Vision of the company:

To be India's financial services company of choice recognized for its reliability, innovation, responsiveness to customers and exemplary citizenship.

D. Slogan:
We work hard so that you stay a step ahead.
The Company have an excellent In-house research Department for Equity, Mutual Funds and Insurance.

The Parent Company & its Branches Unicon is a customer focused financial serves organization, providing a range of investment solutions to their customers, some of which are:Equity Back Office Commodity Portfolio Management
5|P a ge

Distribution Fixed Income Currency Derivatives

NRI Services Investment Banking Depository

2) Literature Review:The studies of literature of related topics are broadly based upon volatility and inception of new trading system derivatives trading Sathya Swaroop Debasish (2009) in his study An Empirical Study on Impact of Index Futures Trading on Spot Market in India examines the effect of futures trading on spot price volatility and market efficiency of the underlying stock market. His study suggests that there is a trade-off between gains and costs associated with the introduction of derivatives trading at least on a shortterm perspective. Prof. Asani Sarkar (2006) in study Indian Derivatives Market Suggest that as derivatives markets will grow more sophisticated, greater investor awareness will become essential. NSE has programmes to inform and educate brokers, dealers, traders, and market personnel. In addition, institutions will need to devote more resources to develop the business processes and technology necessary for derivatives trading. Prof. Ashutosh Vashishtha & Mr. Satish Kumar (2010) in their study Development of financial derivatives Market in India- A case study explained how derivatives market has grown from its nascent stage to capturing almost 60 % of market share. They have used secondary data provided at NSE to comment a conclusion. In the paper Issues and concerns of commodity derivative market in India: An agenda for research, Mr. Nilanjan Ghosh(2006), discussed the micro-economics and macro-economic concerns of not only commodity derivatives but also he tried to shed some light on how the future farket of commodities would behave like. Mr. Bhagaban(2007) Das in his report An economic study of Impact of futures trading on the stability of stock index in India has done a comprehensive study on stability of NSE Sensex returns by using two statistical tests namely Kolmogorov Smirnov 2-sample test and Wilcoxon Rank Sum test, and by use of daily observations on the NSE index over the period of study is from Jan 1996 to Dec 2007.He tried to relate how things got changed when in 2001 Derivatives were introduced. Dr. (MRS.) Kamlesh Gakhar(2008), in his paper Derivatives market in India : Evolution, Trading mechanism & Future prospects has shown how the derivative market has grown in India, the paper state that marked with the ability to partially and fully transfer the risk by locking in assets prices, derivatives are gaining popularity among the investors. The paper also has shown the
6|P a ge

issues related to the derivative market, which when solved will boost the investors confidence to a new level. Mr. Matloob Ullah Khan, Dr. Ambrish Gupta & Dr. Sadaf Siraj(2005) in his paper Regulations and accounting treatment of future and options in Indian derivative market they discussed about the Regulation of Indian Derivative Market as per Dr. L.C. Gupta committee report and they also described accounting adjustment procedure of Future and Option at the time of payment or receipt of mark-to-market margin, initial margin, open interest as on balance sheet date, final settlement or square-up, daily settlement, at the time of default, discloser requirement and method for determination of profit or loss in multiple option situations.

3) Research Gap: The previous researchers had either used primary or secondary data. This report will have both primary and secondary data analysis together. Previous researchers have not shown the perception of the investor Most of the research is being done up to 2009-09, before euro zone crisis, this report will contains analysis after the Eurozone crisis. Previous researchers havent discussed and analysed top ten stocks traded on derivative market, this report will do. Previous researchers do not discussed the prevailing myths about derivative market, in this report I will try to cover the myths which came into my knowledge during discussion with depository participants & Investors at Unicon. Previous researchers have done their study mostly on a section of derivatives; this will take derivative market as a whole. Previous researchers havent tried to analyse the awareness level among investors about derivative market, this report will do. Previous researchers did not had tried to analyse preference of investor in terms of fixed income and trading/investment. None of the above research has been done in relation to the point of view of a brokerage firm.

7|P a ge

4) Introduction to research:Since its Inception, the stock market is all about boosting investors confidence. The same has been strengthened by introduction of Derivative trading for stocks in June, 2000. The turnover of derivatives on the NSE increased from Rs 24 billion in 2000-2001 to Rs 292,482 billion in 2010-1011, and reached Rs 313,497 billion in 2011-2012. India is one of the most successful developing countries in terms of a vibrant market for exchangetraded derivatives. This reiterates the strengths of the modern development in Indias securities markets, which are based on nationwide market access, anonymous electronic trading, and a predominantly retail market. There is an increasing sense that the equity derivatives market plays a major role in shaping price discovery. With such boost in the segment, it becomes very fascinating sector for many investors/traders. But as the good and evil are the opposite side of the same coin, derivative market surely has some hidden risk and concerns. It is of essence need is to analyse how trading happens in this new system of trade. What & how the price varies Special emphasis on game of premium. What are the risks involved how to tackle them and most importantly to use them for profit generation. What and how the investors see or feel about derivative markets. This report will try to shed some lights upon these issues.

5) Why Derivative Market?

Since its introduction in 2000, financial derivatives market in India has shown a remarkable growth both in terms of volumes and numbers of traded contracts. NSE alone accounts for 99 % of the derivatives trading in Indian markets. Comparing the trading figures of NSE and BSE, performance of BSE is not encouraging both in terms of volumes and numbers of contracts traded in all product categories and the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. Today with almost 70% of overall market capitalization, the market seems to be still way under its actual potential because of lack of knowledge and investors confidence. The reason behind choosing Derivative market lies in the fact itself that the Derivatives was introduced to increase Volume, Volatility and reducing risk factor in the market.
8|P a ge

Such an exponential boost, then also traders feels uneasy in investing in derivative market, lot of myths prevailing, many say only game of luck, why is it so??? To go in depth of these is the basic purpose of this research project, to see what present scenario is and what the perception of investors about it is.

6) The Problem Statement:Since its inception in 2001 the derivative market has established records in terms of turnover and volume traded. From nothing it almost captured 70 % of total traded in capital market. So much success and still the sector remain quite a distant dream for small and marginal traded, this fact itself make people wonder why is it so?, to understand this one need to understand the concepts that how actually traded happens in derivative market, How the premium plays a role, what is investors perception about it and what lies in the future for it. Moreover as an intern in a depository participant firm, it is of great importance for me to analyse what does customer feels about the firms related to the sector, what they want in terms of quality services, timely advice, technological support, etc.

A. Defining the Problem:The research will be based upon data collected by both primary and secondary sources. Based upon primary data, the report will try to determine following:a) What percentage of male and female user performs derivative trading? b) What is the age group involved most in trading? c) Income range, and its percentage involved in trading? d) Where do the investors place their savings? e) What they think about various investment instruments? f) What they feel about derivative trading? g) In which of the derivative instrument they trade? h) Advantage & dis advantage of derivative trading, etc. From the secondary data the project will try to shed some lights upon:A. Last 5 years growth in derivative market. B. Which stocks traded the most?
9|P a ge

C. Comparison of these top stocks traded volume with the actual share price for last 5 years. D. Segment wise growth of volume trade in different derivatives. E. Volume trade and turnover of different types of derivatives.

B. Defining the Hypothesis:Hypothesis 1:- Testing the significance difference between deliveries of services from Depository participant firm to their investors. H10 (Null Hypothesis): There is no significance difference between deliveries of services from
different Depository participant firm to its investors.

H11 (Alternate Hypothesis): There is significance difference between deliveries of services

from Depository participant firm to its investors.

Hypothesis 2: - Testing the significance difference of choice for different trading and investment options. H20 (Null Hypothesis): There is no significance difference of choice for different trading and
investment options.

H21 (Alternate Hypothesis): There is significance difference of choice for different trading and
investment options

7) Scope of the Project:The report will try to give the overview of the Derivative market segment, it would also emphasis how and why there is an exponential growth in volume of derivative trading. Not limiting to any one segment the report would give a view of derivative market as whole. By analysing the past figures and the survey data the project could be able to give a picture where the derivative market will go on and what is in it for small and medium traders.

8) Importance of Project:The project will help in understanding the current, past and future scenario of the Derivative market, it will also help in understanding what derivative trading is all about and in a market full of speculations how one can make money based upon calculations and strategies.

10 | P a g e

The project will also help in understanding how and why the market moves, what impacts it both in terms of Bullish and Bearish behaviour. The project will be able to shed some light on Unicons perception and satisfaction level among its customers and employees.

9) Objectives of Project: To know about different types of Financial Derivative. To understand some of the concepts and strategies of the Derivatives Trading used by investors and brokers in day to day trading. To analyse the performance of Derivatives trading since 2001, with special reference to Future and Options. To know the Depository Beneficiary perception towards derivative trading. To analyse top 10 stocks traded on derivative market for past 5 years and their corresponding share prices. To know the volume traded in each segment in last decade and how it has grown from its nascent stage to capitalizing a total market share of almost 70%.

10) Research Methodology:1. Method of data collection:a) Secondary Data:- The utilization of data already collected by someone or some organization on the topic related. In this project the source of secondary data would be the websites of NSE, BSE, Moneycontrol, India Infoline, etc. In addition to it books and journals on the topic derivatives would also be used as to collect data. b) Primary Data:- the data collected via interview and questionnaire. It will be the data collected to give better analysis and thus a better picture of the objectives of the report. 2. Research Design:As the data is both primary and secondary in nature, Exploratory and Descriptive research design is going to be used in the project. The exploratory research will give an insight on the topics concerned whereas the descriptive research will be used to determine the frequency with which something occurs. 3. Sampling Methodology:a) Sampling techniques: - To collect primary data, questionnaire will be prepared. To draft the questionnaire the sampling techniques, which is going to be used iscombination of Nominal Scale and likert scale. b) Sampling Strategy: - Random Sampling is done among investors to collect data.
11 | P a g e

c) Sample Size: - the sample size of primary data would be around 150 respondents. d) Population of interest:- Investors, Depository Participants and persons having knowledge of Capital market and the ones who trade in it 4. Preparation of the questionnaire:The questionnaire contains set of questions which will be used in the collection of primary data which will further give in depth and desired citation of the problem. In the preparation of questionnaire dependent and in dependent variables are considered and according to them only the questions are formulated. For example, quality of service, brokerage rate, time dedicated, technology provided and awareness of brokerage firm are independent variable and perception and requirement of investors from their respective firms is dependent variable. 5. Method Of data Collection:The data will be collected over personal interview, over phone, online both through mail and surveys posting on trading blogs. 6. Data Analysis:To analyse the data, data analysing tools like, IBM SPSS, Minitab and Sofatab will be used. Also the statistical method that will be used would be Co-relation, Co-Variance and Regression analysis. In addition to it, Ms Excel will be used to project the data in more concise and meaningful manner via tables, charts and graph.

12 | P a g e

DATA COLLECTED FROM SECONDARY SOURCES:

1. Business Growth In Future And Option Segment:-

a) Index Future:Year 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. Of Contracts 96100385 146188740 165023653 178306889 210428103 156598579 81487424 58537886 21635449 17191668 2126763 1025588 90580 Turnover (In Rs. Cr) 2527130.76 3577998.41 4356754.53 3934388.67 3570111.4 3820667.27 2539574 1513755 772147 554446 43952 21483 2365

Turn Over(In Rs. Cr.)

5000000 4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0

13 | P a g e

No. Of Contracts
250000000 200000000 150000000 100000000 50000000 0

b) Stock Futures:Year 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. Of Turnover Contracts 147711691 4223872.02 158344617 4074670.73 186041459 5495756.7 145591240 5195246.64 221577980 3479642.12 203587952 7548563.23 104955401 3830967 80905493 2791697 47043066 1484056 32368842 1305939 10676843 286533 1957856 51515 -

14 | P a g e

No. Of Contracts
250000000 200000000 150000000 100000000 50000000 0

Turnover
8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0

15 | P a g e

c) Index Options:-

Year 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01

No. Of Contracts 85812669 820877149 864017736 650638557 341379523 212088444 55366038 25157438 12935116 3293558 1732414 442241 175900

National Turnover In Rs Cr. 2477832.51 22781574.14 22720031.64 18365365.76 8027964.2 3731501.84 1362110.88 791906 338469 121943 52816 9246 3765 -

No. Of Contracts
1E+09 900000000 800000000 700000000 600000000 500000000 400000000 300000000 200000000 100000000 0

16 | P a g e

National Turnover In Rs Cr.

25000000 20000000 15000000 10000000 5000000 0

d) Stock Option:Year 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2013-14 2012-13 No. Of Contracts 8938993 66778193 36494371 32508393 14016270 13295970 9460631 5283310 5240776 5045112 5583071 3523062 1037529 8938993 66778193 National Turnover (in Rs. Cr.) 270642.54 2000427.29 977031.13 1030344.21 506065.18 229226.81 359136.55 193795 180253 168836 217207 100131 25163 270642.54 2000427.29

17 | P a g e

National Turnover (in Rs. Cr.)

2500000 2000000 1500000 1000000 500000 0

No. Of Contracts
80000000 70000000 60000000 50000000 40000000 30000000 20000000 10000000 0

18 | P a g e

e) Total:Year 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. Of Contracts 116866161 1131467418 1205045464 1034212062 679293922 657390497 425013200 216883573 157619271 77017185 56886776 16768909 4196873 90580 Turnover In Rs. Cr. 3400694.86 31533003.96 31349731.74 29248221.09 17663664.57 11010482.2 13090477.75 7356242 4824174 2546982 2130610 439862 101926 2365 Avg. Daily Turnover In Rs. Cr. 147856.3 126638.57 125902.54 115150.48 72392.07 45310.63 52153.3 29543 19220 10107 8388 1752 410 11

Avg. Daily Turnover In Rs. Cr.

160000 140000 120000 100000 80000 60000 40000 20000 0 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

19 | P a g e

Questions:-

20 | P a g e

21 | P a g e

22 | P a g e

23 | P a g e

24 | P a g e

25 | P a g e

Bibliography:1. Books Referred:Hull ,John C. , Basu, Sankarshan, Options, Futures, And Other Derivatives, 7th Edition, 2011, Pearson Prentice Hall. 2. Reports And Journals Referred: FINANCIAL DERIVATIVES MARKET IN INDIA CURRENT SCENERIO & GROWTH, Author:- MS. PARUL MITTAL, ZENITH International Journal of Business Economics & Management research, Vol.2 Issue 8, August 2012, ISSN 2249 8826 An Empirical Study on Impact of Index Futures Trading On Spot Market in India Author:- Sathya Swaroop Debasish, Kca Journal Of Business Management. Vol. 2, Issue 2 (2009). Development of Financial Derivatives Market in India- A Case Study Authors:Ashutosh Vashishtha & Satish Kumar, International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 37 (2010), EuroJournals Publishing, Inc. 2010 3. Resource Used: http://www.nseindia.com/ http://www.eurojournals.com/finance.htm

26 | P a g e