A

SYNOPSIS ON

“HEDGING ON DERIVATIVES”

AT

“SHARE KHAN SECURITIES LTD”

Submitted in partial fulfillment of the requirement for the award of the

MASTER OF BUSINESS ADMINISTRATION

BY

M NIHARIKA

H.T NO: 1422-21-672-226

Department of management studies

CSI INSTITUTE FOR P.G. STUDIES

(Affiliated to Osmania University)

EAST MARREDPALLY, SECUNDERABAD, TELENGANA

2021-2023
 INTRODUCTION

Hedging is defined as holding two or more positions at the same time, where the purpose is to

offset the losses in the first position by the gains received from the other position.

Usual hedging is to open a position for a currency A, then opening a reverse for this position

on the same currency A. This type of hedging protects the trader from getting a margin call,

as the second position will gain if the first loses, and vice versa.

However, traders developed more hedging techniques in order to try to benefit from hedging

and make profits instead of just to offset losses.

1. 100% Hedging.

This technique is the safest ever, and the most profitable of all hedging techniques while

keeping minimal risks. This technique uses the arbitrage of interest rates (roll over rates)

between brokers. In this type of hedging you will need to use two brokers. One broker which

pays or charges interest at end of day, and the other should not charge or pay interest.

However, in such cases the trader should try to maximize your profits, or in other words to

benefit the utmost of this type of hedging.

The main idea about this type of hedging is to open a position of currency X at a broker

which will pay you a high interest for every night the position is carried, and to open a

reverse of that position for the same currency X with the broker that does not charge interest

for carrying the trade. This way you will gain the interest or rollover that is credited to your

account.

However there are many factors that you should take into consideration.

A). The currency to use. The best pair to use is the GBPJPY, because at the time of writing

this article, the interest credited to your account will be 24 usd for every 1 regular long lot
you have. However you should check with your broker because each broker credits a

different amount. The range can be from $10 to $26.

B). The interest free broker. This is the hardest part. Before you open your account with such

a broker, you should check the following: i. Does the broker allow opening the position for an

unlimited time? ii. Does the broker charge commissions?

Some brokers charge $5 flat every night for each lot held, this is a good thing, although it

seems not. Because, when the broker charges you money for keeping your position, the your

broker will likely let you hold your position indefinitely.

C). Equity of your account. Hedging requires lots of money. For example, if you want to use

the GBPJPY, you will need 20,000USD in each account. This is very necessary because the

max monthly range for GBPJPY in the last few years was 2000 pips. You do not want one of

your accounts to get a margin call. Do not forget that when you open your 2 positions at the 2

brokers, you will pay the spread, which is around 16 pips together. If you are using 1 regular

lot, then this is around 145 usd. So you will enter the trades, losing 145 usd. So you will need

the first 6 days just to cover the spread cost. Thus if you get a margin call again, you will

need to close your other position, and then transfer money to your other account, and then re-

open the positions. Every time this happens, you will lose 145 usd!

It is very important not to get a margin call. This can be maintained by a large equity, or a

fast efficient way to transfer money between brokers.

D). Money management. One of the best ways to manage such an account is to monthly

withdraw profits and balancing your positions. This can be done by withdrawing the excess

from one account, take out the profits, and depositing the excess into the losing account to
balance them. However, this can be costly. You should also check with your broker if he

allows withdrawals while your position is still open. One efficient way of doing this is using

the brokerage service withdrawals which are provided by third party companies.

TYPES OF DERIVATIVES

The following are the various types of derivatives.

FORWARDS:

A forward contract is a customized contract between two entities, where settlement takes

place on a specific date in the future at today’s pre-agreed price.

FUTURES:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time

in the future at a certain price. Futures contracts are special types of forward contracts in the

sense that the former are standardized exchange traded contracts.

OPTIONS:

Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to

buy a given quantity of the underlying asset, at a given price on or before a give future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date.

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.

LEAPS:

The acronym LEAPS means long-term Equity Anticipation securities. These are options

having a maturity of up to three years.

Basket options are options on portfolios of underlying assets. The underlying asset is usually

a moving average of a basket of assets. Equity index options are a form of basket options.

SWAPS:

Swaps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts.

The two commonly used Swaps are:

Interest rate Swaps:

These entail swapping only the related cash flows between the parties in the same currency.

Currency Swaps:

These entail swapping both principal and interest between the parties, with the cash flows in

on direction being in a different currency than those in the opposite direction.

SWAPTION:

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 received 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

received floating.

PARTICIPANTS IN THE DERIVATIVE MARKETS

The following three broad categories of participants:

HEDGERS:

Hedgers face risk associated with the price of an asset. They use futures or options markets to

reduce or eliminate this risk.

Speculators wish to bet on future movements in the price of an asset. Futures and options

contracts can give them an extra leverage; that is, they can increase both the potential gains

and potential losses in a speculative venture.

ARBITRAGERS:

Arbitrageurs are in business to take of a discrepancy between prices in two different markets,

if, for, example, they see the futures price of an asset getting out of line with the cash price,

they will take offsetting position in the two markets to lock in a profit.

NEED AND IMPORTENCE OF STUDY

One of the single best things you can do to further your education in trading is to keep

thorough records of your trades. Maintaining good records requires discipline, just like good

trading. Unfortunately, many commodity traders don’t take the time to track their trading

history, which can offer a wealth of information to improve their odds of success most

professional traders, and those who consistently make money from trading Derivatives, keep

diligent records of their trading activity. The same cannot be said for the masses that

consistently lose at trading commodities.

Losing traders are either too lazy to keep records or they can’t stomach to look at their

miserable results. You have to be able to face your problems and start working on some

solutions if you want to be a successful trader. If you can’t look at your mistakes and put in

the work necessary to learn from them, you probably shouldn’t be trading Derivatives.
SCOPE OF THE STUDY

The Study is limited to “Hedging on Derivatives” with special reference to Futures and

Option is the Indian context and the SHAREKHAN SECURITIESL LTD have been Taken

as a representative sample for the study. The study can’t be said as totally perfect. Any

alteration may come. The study has only made a humble Attempt at evaluation derivatives

market only in India context. The study is not based on the international perspective of

derivatives markets, which exists in NASDAQ, CBOT etc.

 To analyze the Hedging on derivative market in India

 To analyze the Hedging operations of futures and options

 To find the profit/loss position of futures buyer and also the option writer and

option holder.

 To study about risk management with the help of derivatives.

The data collection methods include both the Primary and Secondary Collection

methods.

1. Primary Collection Methods:

This method includes the data collected from the personal discussions with the

authorized clerks and members of the Exchange.

2. Secondary Collection Methods:

The Secondary Collection Methods includes the lectures of the superintend of

the Department of Market Operations, EDP etc, and also the data collected from the

News, Magazines of the NSE, HSE and different books issues of this study.

DESCRIPTION OF THE METHOD:

The following are the steps involved in the study.

Selection of the script :

The scrip selection is done on a random and the scrip selected is M/S. SHAREKHAN

SECURITIESL LTD. The lot size is 500. Profitability position of the futures buyer and seller and

also the option holder and option writer is studied.

Data Collection:

The data of the M/S. SHAREKHAN SECURITIES LTD has been collected from the “National

Stock exchange” and the internet. The data consist of the December 2022 contract and the period

of data collection is from 28TH November-20 to 24th December-22.

The analysis consist of the tabulation of the data assessing the profitability positions of the

futures buyer and seller and also option holder and the option writer, representing the data with

graphs and making the interpretation using data.

LIMITATIONS OF THE STUDY:

The following are the limitation of this study.

 The scrip chosen for analysis is M/S. SHAREKHAN SECURITIES LTD and the

contract taken is December 2022ending one –month contract.

 The data collected is completely restricted to the M/S. SHAREKHAN SECURITIES

LTD of December 2022; hence this analysis cannot be taken universal.