Table Of ContentFutures 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
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Tata McGraw-Hill Publishing Company Limited
ISBN 0-07-048386-8
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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
