PROJECT ON DERIVATIVE MARKET WITH FUNDAMENTAL & TECHNICAL ANALYSIS
||PROJECT ON DERIVATIVE MARKET WITH FUNDAMENTAL & TECHNICAL ANALYSIS
DERIVATIVE MARKET .pdf (Size: 995.82 KB / Downloads: 25)
The liberalization of the Indian economy has ushered in an era of opportunities for the Indian
corporate sector. however, these opportunities are accomplished by challenges. The corporate are
now required to operate at global capacities to be able to reap the benefits of economies of scale
and be competitive. To operate at global capacities, huge investments are called for and the main
source of fund in the public at large. Therefore, the corporate now started tapping the capital
market in a big way. The response is also encouraging.
As the Indian nation integrates with world economy era, small tremors in the world market starts
affecting the Indian economy. As an example, interest rates have been south bound in the world
and the same has happened in the Indian market too. fixed income rates have fallen drastically
due to fall in the real income of people. To overcome this fall , investors have been continuously
seek to increase the yield of their of their investments. But, it is a time-tested fact that, the yields
on investment in equity shares are maximum, the accompanying risks are also maximum.
Therefore, it is absolutely essential that efforts should be made to reduce this factor. The
reduction of risk can be achieved through the process of μhedging¶ using μderivatives¶ financial
instrument. A hedge is any act that reduced the price risk of an existing or anticipated position in
the cash market. Basically, there are two type of hedging with futures :long hedge and short
SCOPE OF THE STUDY
Introduction of derivatives in the Indian capital market is the beginning of a new era , which is
truly exciting. Derivatives, worldwide are recognized risk management products. These products
have a long history in India, in the unorganized sector , especially in currency and commodity
markets. The availability of these products on organized exchanges ha provided the market
participants with broad based risk management tools.
This study mainly covers the area of hedging and speculation. The main aim of the study is to
prove how risks in investing in equity shares can be reduced and how to make maximum return
to the other investment.
TYPE OF RESEARCH
The type of research is selected on the basis of problems identified. Here the research type used
is descriptive research. Descriptive research includes fact-findings and enquiries of different
kinds. The major purpose of descriptive research is a description of the state of affairs, as it
exists in the present system. In this dissertation an attempt has been made to discover various
issues related to derivatives in the Indian market and how they help the hedge the risk.
REVIEW OF LITURATURE
Financial derivatives are so effective in reducing risk because they enable financial Institutions
to hedge that is, engage in a financial transaction that reduces or eliminates risk. When a
financial institution has bought an asset, it is said to have taken a long position, and this exposes
the institution to risk if the returns on the asset are uncertain. Conversely, if it has sold an asset
that it has agreed to deliver to another party at a Future date, it is said to have taken a short
position, and this can also expose the Institution to risk. Financial derivatives can be used to
reduce risk by invoking the following basic principle of hedging :Hedging risk involves
engaging in a financial transaction that offsets a long position by taking an additional short
position, or offsets a short position by taking an additional long position. In other words, if a
financial institution has bought a security and has therefore taken a long position, it conducts a
hedge by contracting to sell that security (take a short position) at some future date.
Alternatively, if it has taken a short position by selling a security that it needs to deliver at a
future date, then it conducts a hedge by contracting to buy that security (take a long position)at a
future date. We look at how this principle can be applied using forward and futures
PARTICIPANTS OF DERIVATIVE
There are three broad categories of participants ±hedgers, speculators and arbitrageurs. hedgers
face risk associated with the price of an assets. They use futures or options markets to reduce or
eliminate this risk. Speculates wish to bet on future movement in the price of an asset. features
and options contracts cangue them an extra leverage;they can increase both the potential gains
and losses in a speculative venture. Arbitrageurs are in business to take advantage of a
discrepancy between prices in two different markets.
According to JOHN C. HUL 3 A derivatives can be defined as a financial instrument whose
value depends on (or derives from) the values of other, more basic underlying variables. ́
According to ROBERT L. MCDONALD 3A derivative is simply a financial instrument (or even
more simply an agreement between two people) which has a value determined by the price of
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the
definition of Securities. The term Derivative has been defined in Securities Contracts
(Regulations) Act, as:-
A Derivative includes: -
a. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security;
b. contract which derives its value from the prices, or index of prices, of underlying securities.
Derivatives were developed primarily to manage, offset or hedge against risk but some were
developed primarily to provide the potential for high returns.
DERIVATIVES MARKET IN INDIA
Prior to liberalization, in India financial markets, there were only a few financial products and
the stringent regulatory products and the stringent regulation environment also eluded any
possibility of development of a derivatives market in country. All Indian corporate were mainly
relying on term lending institution for meeting their project financing or any other financing
requirements and on commercial banks for meeting working capital finance requirement.
Commercial banks are on their assets and liabilities. The only derivative product they were
aware of is the foreign exchange forward contract. But this scenario changed in the post
liberalization period. Conservative Indian business practitioners began to take a different view of
various aspects of their operations to remain competitive. Financial risks were given adequate
attention and .treasury function. has assumed a significance role in all major corporate since
then. Initially, banks were allowed to pass on gains arising out of cancellation of forward.s
contracts to the customers and customers were permitted to cancel and re-book the forward
contracts. This remarkable change was followed by the introduction of cross currency forward
contacts. But the major milestone in developing forex derivatives market in India was the
introduction of cross currency options. The RBI.s objective of introducing cross currency options
was to provide a complicated hedging strategy for the corporate in their risk management
activities. The concept of .derivatives. is of course not new to the Indian market. Though
derivatives in the financial markets have nothing to talk about home, in the commodity markets
they have a long history of over hundred years. In 1875, the first commodity futures exchange
was set up in Mumbai under the guidance of Bombay Cotton Traders Association. A
clearinghouse for clearing and settlement of these traders was set up in 1918.