Futures And Options PDF
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Futures and Options Second Edition Authors Dr N D Vohra is currently working as Reader in the Department of Commerce, Ramjas College, University of Delhi. He received his doctorate from Delhi School of Economics, University of Delhi. He has extensive teaching and research experience. He has earlier worked as Director of Research at BLB Limited. His other publications, also from Tata McGraw Hill Publishing Company Ltd, include: â Quantitative Techniques in Management â Theory and Problems in Quantitative Techniques in Management B R Bagri is the Chairman of the BLB Limited. He holds a BSc (Hons.) degree in Mathematics from University of Delhi and also a PGDBM from All India Management Association (AIMA). He has over three decades of experience in capital market operations. With Best Compliments from BLB Ltd. Futures and Options Second Edition N D Vohra Reader Department of Commerce Ramjas College University of Delhi B R Bagri Chairman BLB Limited Tata McGraw-Hill Publishing Company Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid MexicoCity Milan Montreal SanJuan Santiago Singapore Sydney Tokyo Toronto © 2003, 1998 Tata McGraw-Hill Publishing Company Limited No part of this publication can be reproduced in any form or by any means without the prior written permission of the publishers This edition can be exported from India only by the publishers, Tata McGraw-Hill Publishing Company Limited ISBN 0-07-048386-8 Published by Tata McGraw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008, Typeset at Script Makers, 19, A1-B, DDA Market, Pashchim Vihar, New Delhi 110 063 and printed at Sai Printo Pack Pvt. Ltd., Y-56 Okhla Industrial Area, Phase II, New Delhi 110020 Cover Printer: Rashtriya Printers RZXCRRADDRALZ To The loving memory of my mother, Jamuna Devi Bagri B R Bagri Foreword Indian Capital Market has undergone dramatic changes over the last several years. SEBI’s endeavour has been to make the Indian Capital Market efficient, effective, transparent and investor friendly. Some initiatives of SEBI in the last few years like introduction of equity derivatives (index futures, index options, individual stock futures and options), reduction of settlement cycle, compulsory rolling settlement in all the scrips and dematerialization bear testimony to it. Introduction of equity derivatives was essentially the beginning of a new era in the Indian Capital Market. With the launch of Index Futures in June 2000, as the first derivative product, SEBI expanded the portfolio by quickly adding index options, individual stock options and individual stock futures. The growth of this market has been quite significant. With these products in place, Indian Capital Market is at par with any other Capital Market across the globe. Derivative products serve the vitally important economic functions of price discovery and risk management. The transparency, which emerges from their trading mechanism, ensures the price discovery in the underlying market. Further, they serve as risk management tools by facilitating the trading of risks among the market participants. These products enable market participants to take the desired risks and jettison the undesirable undertones. To facilitate the development of the derivatives market, it is necessary to educate the market participants and investors on the nuances of these new age products and their strategic uses. This book is a comprehensive work on the subject and presents the complicated terminology of the derivatives in a simplified and lucid manner. I viii Foreword sincerely believe that it would make meaningful contributions to the Capital Market by sharing the required knowledge to its various participants. G.N. BAJPAI CHAIRMAN, SECURITIES AND EXCHANGE BOARD OF INDIA, (MUMBAI, INDIA) Preface to the Second Edition We are pleased to present the second edition of Futures and Options to our esteemed readers. The overwhelming response to the first edition has been a highly motivating experience to us. Since the publication of the first edition, the Indian Capital Market has witnessed many significant changes. Physical securities have given way to dematerialization and the concept of market lot has been abolished. Similarly, rolling settlement has replaced the weekly/ fortnightly settlements and the age-old Badla has been abolished. However, the most notable change in the capital market scenario has been the introduction of derivatives trading since the last two-and-a- half years. After the introduction of such trading in the year 2000 with stock index futures, other products including options on stock indices, options on individual stocks and futures on individual stocks were introduced subsequently. At the time of the publication of the first edition of this book, trading of derivative instruments in the Indian market was not instituted. Now that derivatives have become an integral part of the Indian Capital Market, it became necessary to update the contents of the book. CHANGES IN THIS EDITION The book has been virtually recast—some portions have been rewritten, chapter contents have been rearranged, additions have been made to the chapters and new chapters have been written in an attempt to make the flow of the subject matter more logical. Use of futures contracts by various market players is illustrated in more detail and futures on stock indices and on individual stocks have been x Preface to the Second Edition discussed in a separate chapter now. The discussion of the Black and Scholes’ model for valuation of stock options has been made crisp and a detailed account of implied volatility and derivatives of the model has been provided. A new chapter, Chapter 6, on options on stock indices and options on futures contracts is included. Another new chapter included in this edition gives an overview of the Indian Securities Market (Chapter 8), while the past and present of futures and options in India is included in Chapter 9. In this edition, a large number of Review Illustrations have been included with the aim of providing the reader with an opportunity to refresh his computational skills involved in the pricing of various derivatives instruments and review other concepts related to them. The book retains the all- important feature of short true–false questions to help the reader reinforce understanding of the concepts and ideas discussed in the book. THE SOFTWARE Like the first edition, a CD-ROM, titled FUTOP (version 2.0.0) accompanies this edition. The tutorial diskette provided with the previous edition evoked very encouraging response. With this edition, a highly improved version of the software has been added. The newly designed software comprises several modules including Valuation of Options, Valuation of Futures, Strategies, Quiz, and Reports of the L.C. Gupta and J.R. Varma Committees established by the Securities and Exchange Board of India (SEBI). More details about the contents of the software are given at the end of the book and are available in the CD-ROM. We wish to acknowledge with gratitude the help that we have received from several people in ways more than one. At the outset, we are obliged to Shri G N Bajpai, the Chairman of the Securities and Exchange Board of India (SEBI), for having written Foreword to the book. We gratefully acknowledge the help and comments of Shri Ravi Narain, Managing Director and Chief Executive Officer, National Stock Exchange of India Limited (NSE), and Dr. Manoj Vaish, Director—Corporate Development, The Stock Exchange, Mumbai (BSE). We are grateful to Prof. Ramesh Bhat of the Indian Institute of Management, Ahmedabad for his comments and suggestions on the previous edition of the book. Prof. Y P Singh of the Department of Commerce, Delhi School of Economics, provided us with useful
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