Bank Of Baroda

DRM Group Assignment Submission, Serial Number: 117; ID: 2015A2PS04902H; Name: Rajat Mishra

1

AN ANALYSIS REPORT ON UNDERLYING ASSET AND DELIVERABLE EQUITY FUTURES AND OPTIONS BY RAJAT MISHRA AND GROUP 3 Under the supervision of DR. THOTA NAGARAJU

BIRLA INSTITUTE OF TCHNOLOGY AND SCIENCE PILANI HYDERABAD CAMPUS (APRIL 2018)

COURSE- DERIVATIVES AND RISK MANAGEMENT (DRM): ECON F354 Dated: 2nd April, 2018


2

IMPORTANT POINTS FOR FURTHER REFERENCE: 

ALL THE FIGURES ARE ROUNDED OF TO 4 DECIMAL PLACES.



FOR FURHTER ACCURACY REFER TO THE EXCEL SHEETS ATTACHED.



THE GRAPHS HAVE PERCENTAGE RETURNS ON Y-AXIS AND DATES ON X-AXIS.



FONT SIZE USED:12



FONT USED: CAMBRIA



REFERENCES ARE ATTACHED AT THE END OF THE REPORT.



ALL CALCUATIONS WHEREVER NECESSARY ARE DONE IN THE ATTACHED EXCEL SHEETS.



DIFFERENT COMPANIES ANALYSED ONE AFTER THE OTHER IN ORDER.



GENERALISED SUMMARY ATTACHED AT THE END OF THE REPORT.



TOOLS USED: 1) PYTHON (FOR DATA SCRAPING) 2) EXCEL (FOR ANAYLSIS)


3 ACKNOWLEDGEMENTS I would like to express my sincerest gratitude to Dr. Thota Nagaraju, for giving me an opportunity to work under him for this project and also taking his valuable time to provide me the required guidance wherever required. His input proved to be very vital for the project. I would like to thank him for providing us with such a wonderful opportunity to apply our course knowledge on real life data and get hands on experience. I am indebted for all his help and guidance throughout the course and this assignment.


4

Bank Of Baroda An analysis report on underlying asset and deliverable Equity Futures and Options

Name

Rajat Mishra

ID number

2015A2PS0490H

Serial number

117


5 TABLE OF CONTENTS SECTION 1: Equity Asset 1.1. Introduction to Equity Asset……………………………………………………………….……….6 1.2. Unadjusted Returns Data…………………………………………………………………………….10 1.3. Adjusted Returns Data………………………………………………………………………………..11 1.4. Economic Interpretation…………………………………………………………………………….12

SECTION 2: Equity Futures Instrument 2.1. Introduction to Equity Futures Instrument …………………………………………………14 2.2. Returns Data…………………………………..………………………………………………………….16 2.3. Economic Interpretation…………………………………..………………………………………..20

SECTION 3: Comparisons 3.1 Comparison on Adjusted and Unadjusted Returns ………………………………..…….21 3.2 Liquidity Position…………………………………..……………………………….…………………..22

SECTION 4: Contango Trends 4.1 Contango Backwardation Trends…………………………………..……………………………23 4.2 Frequency significance ………………………………………………………………………………24

SECTION 5: Options 5.1 Option Price calculations ...…………………….…………………………………………………...25 5.2 Observations and discussion ………………………………………………………………………25

SECTION 6: Conclusion 6 Conclusion …………………….......…………………….…………………………………………………...26


6 SECTION-1 1.1 Introduction to Equity Asset 1) Nature of Business: Bank of Baroda is involved in the following activities.     

Rural and Agricultural banking Corporate banking Retail banking SME Wealth management

Bank of Baroda is engaged in providing various services, such as personal banking, corporate banking, international banking, small and medium enterprise (SME) banking, rural banking, non-resident Indian (NRI) services and treasury services. The Bank's segments include Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations. The Bank offers personal banking services, such as deposits, loans, mobile banking and wealth management services; business banking services, such as Baroda Money Express, debit cards and collection services; corporate banking services, such as appraisal and merchant banking, and cash management and remittances; international banking services, such as export, import and trade finance, and correspondent banking; rural banking services, such as deposits, priority sector advances, financial inclusion and lockers, and treasury services, such as domestic and forex operations. The Bank operates a network of approximately 5,330 branches.

2) Public/Private Ownership: Public Ownership: Joint Venture by Government of India In 1996, Bob Bank entered the capital market in December with an Initial Public Offering (IPO). The Government of India is still the largest shareholder, owning 66% of the bank's equity. Public Ownership- 66% Private Ownership- 34%


7

3) Inception and Circumstances: The inception of the bank took place on 20th July 1908, 109 years ago. The bank was founded by Maharaja Sayajirao Gaekwad III of Baroda to look after the financial activities of the princely State and Gujarat after expansion. It started with a paid up capital of Rs. 10 lakh. Bank of Baroda is a pioneer in various customer centric initiatives in the Indian banking sector. Bank is amongst first in the industry to complete an all–inclusive rebranding exercise wherein various novel customer centric initiatives. In the present day scenario, the board of directors consists of 11 members headed by CEO and MD Mr. P. Jayakumar. Bank Of Baroda INSIDERS ON Board Members Name (Connections)

Relationships

Title

Age

P. Jayakumar

19 Relationships

MD, CEO & Director

55

Ashok Garg

19 Relationships

Executive Director

59

Mayank Mehta

19 Relationships

Executive Director

59

Papia Sengupta

10 Relationships

Executive Director

58

Other Board Members On Board Members Name (Connections)

Relationships

Type of Board Members

Primary Company

Ravi Venkatesan

63Relationships

Chairman of the Board

Unitus Seed Fund LLC

Age 54


8 Name (Connections)

Relationships

Type of Board Members

Primary Company

Age

Bharatkumar Dhirubhai Dangar

10Relationships

Member of the Board of Directors

Bank of Baroda

39

Usha Narayanan

10Relationships


Bank of Baroda

58

Biju Varkkey

26Relationships


Husys Consulting Limited

52

Gopal Agarwal

10Relationships


Bank of Baroda

55

Ajay Kumar

10Relationships


Bank of Baroda

48

Soundara Kumar

10Relationships


Bank of Baroda

62

(TABLE 1)

4) Industry and Significance in Industry: Public Financial Banking industry. Provides banking services to consumers and corporate companies. It provides private equity to buy, Mortgage loans, insurances, investment banking solutions, credit cards and wealth management services. India’s 5th largest bank in terms of assets.

5) Overall greatness of the company: • • •

10 banks have merged with the bank since its inception. Has a network of 5538 branches in India and abroad and 10441 ATM’s earning it the tagline of “India’s International Bank”. BoB has total Assets in excess of Rs. 6.94 trillion making it India’s 3rd biggest bank.


9 • • • •

Has positive net and operating incomes of Rs. 1384.14 crore and Rs. 10975.07 crore in the current Financial year showing good management and confidence of bankers. A healthy dividend payout ratio is also maintained by the company. Bank Of Baroda had last declared a dividend of 60.00% for the year ending March 2017. The company has been realizing constant profit over the last few quarters and has been consistent. (Observe the table below.)

1.2 Risk Unadjusted Returns Data

TABLE 2 (Returns Vs Time) Returns (frequency) Mean Max Min Standard Deviation

Daily

Weekly -0.0060 27.3346 -10.7993 2.7685

Monthly -0.0071 25.6818 -15.2476 5.7914

-0.2270 21.0860 -22.2503 10.0482

Daily Risk Unadjusted Returns(%) Vs Time 20 10 0 -10 -20

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Returns (%)

30

Date

Returns (%) -5

-10

-15

Returns (frequency) Mean Max Min Standard Deviation -25

Daily

-0.0059 27.3347 -10.7993 2.7685

Weekly

-0.1451 25.5510 -15.4010 5.7916

01-01-2018

01-11-2017 01-12-2017

01-10-2017

01-08-2017 01-09-2017

01-06-2017 01-07-2017

01-05-2017

01-03-2017 01-04-2017

01-01-2017 01-02-2017

01-12-2016

01-10-2016 01-11-2016

01-09-2016

01-07-2016 01-08-2016

01-05-2016 01-06-2016

01-04-2016

01-02-2016 01-03-2016

01-01-2016

01-11-2015 01-12-2015

01-09-2015 01-10-2015

-20

01-08-2015

-15

01-06-2015 01-07-2015

-10

01 April 2015 01 May 2015 01 June 2015 01 July 2015 01 August 2015 01 September 2015 01 October 2015 01 November 2015 01 December 2015 01 January 2016 01 February 2016 01 March 2016 01 April 2016 01 May 2016 01 June 2016 01 July 2016 01 August 2016 01 September 2016 01 October 2016 01 November 2016 01 December 2016 01 January 2017 01 February 2017 01 March 2017 01 April 2017 01 May 2017 01 June 2017 01 July 2017 01 August 2017 01 September 2017 01 October 2017 01 November 2017 01 December 2017 01 January 2018

-5

01-05-2015

Returns(%)


10

Weekly Risk Unadjusted Returns(%) Vs Time

30

25

20

15

10

5

0

Time

Monthly Risk Unadjusted Returns(%) Vs Time

25

20

15

10

5

0

-20

Date

1.3 Risk Adjusted Returns Data

Table (3)

Monthly

-0.8244 20.5307 -22.8973 10.0484

Returns (%) -5

-10

-15

-20

-5

-10

-15

-30

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

-20


Returns (%) -10

01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Reurns(%)


11

Daily Risk Adjusted Returns(%) Vs Time

30

20

10

0

Date

Weekly Risk Adj Return(%) Vs Time

30

25

20

15

10

5

0

Time

Monthly Risk Adjusted Returns(%) Vs Time

25

20

15

10

5

0

-20

-25

Time


12 1.4 Economic Interpretation:

Risk Adjusted Return: This is a measure of how much risk is involved in producing some return, generally indicated by a number/rating. Sharpe Ratio has been used to indicate the Risk Adjusted Return.

The risk adjusted returns are always lesser than the risk unadjusted returns. The risk adjusted return is a more economically practical indicator, as the risk unadjusted returns may give a misleading picture. To be profitable, risk adjusted returns (instead of risk unadjusted returns), should be greater than risk-free returns; since if that is not the case, an investor can make greater profits by investing in risk-free asset. Time Period Daily Weekly Monthly

Sharpe Ratio -0.0093 -0.0251 -0.0820

(TABLE 4)

Equity 0 -0.01

Sharpe Ratio

-0.02

Daily 1

2

3

Weekly

-0.03 -0.04 -0.05 -0.06 -0.07

Monthly

-0.08 -0.09

Time Period


13 Observations:  The volatility and standard deviation is almost similar in risk unadjusted returns than in risk adjusted returns.  The percentage of mean returns decreases from daily, weekly to monthly in both risk unadjusted and risk adjusted returns.  The volatility is increasing from daily, weekly to monthly in risk unadjusted returns.  The volatility is increasing from daily, weekly to monthly in risk adjusted returns. Action: 

 

Therefore, for a risk-loving investor, it is not a suitable option is to follow a Monthly Investment Schedule, since it involves taking higher risk (due to greater time period), and is instead gives lower (mean) returns than the Daily and Weekly investment alternatives, even though they present lower risk. Its rather better to follow a short term investment schedule and carry on with day trading than invest in longer periods of weekly or monthly periods. But since all returns are negative it would be wiser to invest in T-bills than in equity for the given time period.

SECTION-2 2.1 Introduction to Equity Futures Instrument 1) Inception of Futures: The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark Nifty 50 Index. The Exchange introduced trading in Index Options (also based on Nifty 50) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 175 securities stipulated by SEBI. The Bank of Baroda Futures Trading commenced from November 9th, 2002. Since then, the trading volume has been growing at an exponential rate. The trading in the futures is currently more than the trading in the corresponding underlying stock, which is a notable point.


14 2) Contract specifications: Given below are the contract specifications for the futures contracts. Since, it is an equity derivative, there is no physical delivery location. However, the lot size is fixed as 3500 shares per lot. Therefore, it is not as lucrative for small, individual traders who wish to trade in smaller lot sizes. However big investment traders can find it easy to trade with the lot size being only 3500 which is still relatively less than other futures stocks of the peer groups. (TABLE 6) Symbol Instrument Lot Size Price Steps Price Bands Trading Cycle Trading hours Expiry date Daily settlement price Final settlement price

Current details: • Traded Volume (contracts) • Traded Value * (lacs) • VWAP • Underlying value • Market Lot • Open Interest • Change in Open Interest • % Change in Open Interest

BANKBARODA FUSTK (futures stock) 3500 shares Rs.0.05 Operating range of 10% of the base price 3 months – Near, next far As in equity derivative segment Last Thursday of expiry month Last half hour's weighted average price closing price of underlying equity on the last trading day of the contract

9,208 52,629.24 142.89 142.20 4000 83,76,000 -1,54,16,000 -64.79

Settlement Price Daily Volatility Annualised Volatility Client Wise Position Limits Market Wide Position Limits

(TABLE 7)

142.30 3.09 59.08 95,16,689 19,03,33,797


15 2.2/2.3 Returns Data (Unadjusted and Adjusted) (*Table number indicated in brackets)

Near Month (8): - Risk Unadjusted Returns Returns Daily (frequency) Mean Max Min Standard Deviation

Weekly

(9)Risk Adjusted Returns Monthly

0.0021 26.8592 -10.7516

-0.0322 26.4899 -14.7663

-0.1325 21.5578 -22.1708

2.7614

5.7966

9.9670

Returns Daily Weekly Monthly (frequency) Mean -0.01761 -0.1704 -0.7312 Max 26.8406 26.3590 21.0027 Min -10.7702 -14.919 -22.8175 Standard Deviation 2.7614 5.7968 9.9669

Next Month (10):- Risk Unadjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Daily

Weekly

Monthly

0.00171 26.8243 -10.4859

-0.0334 26.4092 -15.5140

-0.1071 21.6634 -22.5616

2.76609

5.8472

9.9414

(11)Risk Adjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Daily

Daily

Weekly

Monthly

0.0017 25.7766 -11.4903

-0.0358 26.0306 -15.8025

-0.0446 21.0542 -20.3403

2.8562

6.0452

9.8735

Underlying (14): - Risk Unadjusted Returns Table 14 is same as Table 2 Table 15 is same as Table 3

Monthly

-0.0179 26.8057 -10.5045

-0.1716 26.2788 -15.6676

-0.7059 21.1086 -23.2083

2.7660

5.8474

9.9410

Far Month (12): - Risk Unadjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Weekly

(13) Risk Adjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Daily

Weekly

Monthly

-0.01793 25.7580 -11.5089

-0.1740 25.8997 -15.9510

-0.6434 20.4989 -20.9870

2.8563

6.0453

9.8728

(15) Risk Adjusted Returns

Returns (%)

-10

-20

-30

01 July 2015

0

01 January 2017

01 December…

01 November…

01 January 2018

01 December…

01 November…

01 October 2017

01 September…

01 August 2017

01 July 2017

01 June 2017

01 May 2017

01 April 2017

01 March 2017

30

25

20

15

10

5

0

31 August 2017

31 July 2017

30 June 2017

31 May 2017

30 April 2017

31 March 2017

31 January 2017 28 February 2017

31 December 2016

30 November 2016

31 October 2016

30 September 2016

31 August 2016

31 July 2016

30 June 2016

31 May 2016

30 April 2016

31 March 2016

29 February 2016

31 January 2016

31 December 2015

30 November 2015

31 October 2015

31 December 2017

01 December 2017 01 January 2018

31 January 2018

31 October 2017 30 November 2017

01 November 2017

30 September 2017

Weely Adjusted Returns(%) Vs Time [Futures: Near Month]

01 October 2017

01 September 2017

01 August 2017

01 July 2017

01 June 2017

01 May 2017

01 April 2017

01 February 2017 01 March 2017

01 January 2017

01 December 2016

01 November 2016

31 August 2015

31 July 2015

30 June 2015

31 May 2015

30 April 2015

31 March 2015

30 September 2015

Time

01 February 2017

Time 01 October 2016

01 September 2016

01 August 2016

01 July 2016

01 June 2016

01 May 2016

01 April 2016

01 March 2016

01 February 2016

01 January 2016

01 December 2015

01 November 2015

01 October 2015

01 September 2015

Time

01 October 2016

01 September…

01 August 2016

01 July 2016

01 June 2016

01 May 2016

01 April 2016

01 March 2016

01 February 2016

01 January 2016

01 December…

01 November…

01 October 2015

01 September…

01 July 2015

01 June 2015

01 May 2015

01 August 2015

-20

01 August 2015

-15

01 June 2015

-10

01 May 2015

-5

01 April 2015

Returns(%) 30 25 20 15 10 5 0 -5 -10 -15

01 April 2015

Returns (%)


16

Graphs depicting Adjusted Returns of NEAR Month Futures Contracts Data:

Daily Unadjusted Returns(%) Vs Time [Futures: Near Month]

Monthly Adjusted Returns(%) Vs Time [Futures: Near Month]

30

20

10

Returns(%)

-5

-10

-15

-20

-30

01 August 2015

01 July 2015

Time

01 January 2018

01 December 2017

01 November 2017

01 October 2017

01 September 2017

01 August 2017

01 July 2017

01 June 2017

01 May 2017

01 April 2017

01 March 2017

01 February 2017

01 January 2017

01 December 2016

20

15

10

5

0

31 July 2017

30 June 2017

31 May 2017

30 April 2017

31 March 2017


31 December 2016

30 November 2016

31 October 2016

30 September 2016

31 August 2016

31 July 2016

30 June 2016

31 May 2016

30 April 2016

31 March 2016

29 February 2016

31 January 2016

31 December 2015

30 November 2015

31 October 2015

30 September 2015

31 August 2015

31 July 2015

30 June 2015

31 May 2015

30 April 2015

31 March 2015

31 December 2017

01 December 2017 01 January 2018

31 January 2018

31 October 2017 30 November 2017

01 November 2017

30 September 2017

25

01 October 2017

30

31 August 2017

Weekly Adjusted Returns(%) Vs Time [Futures: Next Month]

01 September 2017

01 August 2017

01 July 2017

01 June 2017

01 May 2017

01 April 2017

01 March 2017

01 February 2017

01 January 2017

01 December 2016

01 November 2016

01 October 2016

01 September 2016

01 August 2016

01 July 2016

01 June 2016

01 May 2016

01 April 2016

01 March 2016

01 February 2016

01 January 2016

01 December 2015

01 November 2015

01 October 2015

Time

01 November 2016

01 October 2016

01 September 2016

01 August 2016

01 July 2016

01 June 2016

01 May 2016

01 April 2016

01 March 2016

01 February 2016

01 January 2016

01 December 2015

01 November 2015

01 October 2015

01 August 2015

01 July 2015

01 June 2015

01 May 2015

01 September 2015

-20

01 September 2015

-25

01 June 2015

-15

01 May 2015

-10

Returns (%) 30 25 20 15 10 5 0 -5 -10 -15

01 April 2015

-5

01 April 2015


17

Graphs depicting Adjusted Returns of NEXT Month Futures Contracts Data:

Daily Adjusted Returns(%) Vs Time [Futures: Next Month]

Monthly Adjusted Returns(%) Vs Time [Futures: Next Month]

25

20

15

10

5

0

Returns(%)

-5

-10

-15

-5

-25

1

2

-20

3

4

5

6

7

8

-10

-15

-20

Time

30

25

20

15

10

5

0

31 May 2017

30 April 2017

31 March 2017


31 December 2016

30 November 2016

31 October 2016

30 September 2016

31 August 2016

31 July 2016

30 June 2016

31 May 2016

30 April 2016

31 March 2016


31 December 2015

30 November 2015

31 October 2015

30 September 2017 31 October 2017 30 November 2017

01 October 2017 01 November 2017 01 December 2017 01 January 2018

Monthly Adjusted Returns(%) Vs Time [Futures: Far Month]

25

20

15

10

5

0

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

31 January 2018

31 December 2017

31 July 2017 31 August 2017

01 September 2017

30 June 2017

Weekly Adjusted Returns(%) Vs Time [Futures: Far Month]

01 August 2017

01 July 2017

01 June 2017

01 May 2017

01 April 2017

01 February 2017 01 March 2017

31 August 2015

31 July 2015

30 June 2015

31 May 2015

30 April 2015

30 September 2015

Time

01 January 2017

01 December 2016

01 November 2016

01 October 2016

01 September 2016

01 August 2016

01 July 2016

01 June 2016

01 May 2016

01 April 2016

01 March 2016

01 February 2016

01 January 2016

01 December 2015

01 November 2015

01 October 2015

01 September 2015

01 August 2015

-15

01 July 2015

-10

31 March 2015

-5

01 June 2015

01 May 2015

01 April 2015

Returns %)


18

Graphs depicting Adjusted Returns of FAR Month Futures Contracts Data:

Daily Adjusted Returns(%) Vs Time [Futures: Far Month]

30

25

20

15

10

5

0


19 2.3 Economic Interpretation Observations: 

The risk adjusted returns are lesser than the risk unadjusted returns.



The volatility and standard deviation is almost similar in risk unadjusted returns and in risk adjusted returns.



The percentage of mean returns decrease from daily, weekly to monthly in risk unadjusted returns in both risk unadjusted and risk adjusted returns.



The volatility is increasing from daily, weekly to monthly in risk unadjusted returns.



The volatility is increasing from daily, weekly to monthly in risk adjusted returns.



Trend in Returns: Near>Next>Far

Action: 

Therefore, both risk-averse and risk-loving investors are advised to follow daily investment schedule to get greater returns with lesser risk.



A hedging investor is also advised to follow daily investment schedule, earning higher returns at lower risk.



Further, more contracts are traded for Near months than Next and Far months wich make them a bettr choice to trade in (point clarified ahead).



But since all returns are negative it would be wiser to invest in T-bills than in equity for the given time period.


20

SECTION-3

COMPARISONS: 

Volatility increases from Near, Next to Far month, however, the mean daily returns (both risk adjusted and risk unadjusted) have remained almost same from Near, Next to Far month, as well as Underlying asset.



Since this is the case, it is advisable to invest in NEAR Month Contracts as compared to Next or Far month, to earn similar returns within a lesser time period.



The returns decreased but the volatility increases from Daily, Weekly to Monthly Frequency.



Therefore for a hedging investor who would like to minimize risk it is advised to take up a daily investment schedule, earning better returns at low risk.



Even for a risk-loving investor it is advisable to take up a daily investment schedule, earning high returns at lower risk.

(1= Equity

2=Near

3=Next

4=Far)

We use the above generated figure to compare the far and middle derivative with near futures and equity returns. We face negative returns on all four instruments on a weekly and monthly frequency trading. The losses in case of near month future is highest in monthly case. The mid and far perform almost equal to Near and equity due to lower volatility in our data. Dailly


21 trading gives us modest positive returns. Near and Mid give returns almost equal to equity but far being illiquid doesn’t generate much return in daily and weekly basis. The closing prices for far month don’t vary much. We perform well on a daily basis generating a risk adjusted return of -0.0176% on average, Near futures being our best performer by return and far month future being best by Sharpe ratio. In conclusion, near month future is our best performer while equity is our worst performer (We choose middle over far due to low liquidity and high transaction cost). To take the advantage of leverage we would choose Near month futures. In conclusion, both Near and Middle have performed better than far and equity months.

Liquidity Position: Considering Daily values, Frequency Average No. of Contracts Average Open Interest

Near

Next 8749 38636869

Far 1596 6246876

12 97376

For Underlying, Average Number of Trades = 58816 Average Traded Quantity = 9368475.02



  

It is seen that the liquidity position worsens from Near, Next to Far month due to decreasing number of contracts and open Interest; thus making it difficult to liquidate the asset by performing trade in Far and Next month. The liquidity position in underlying asset lies between next and near month. Near Month has best liquidity position, i.e., near month futures contracts are being traded more than underlying stock. However, average number of Trades is greater in underlying stock than average number of Contracts any month contract of futures.


22 SECTION-4

3.3 Contango or Backwardation Trends: Contango is a situation where the futures price of a commodity is above the expected future spot price while Backwardation refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. During the period of observation, for 636 days (85.81%) near contract is greater than underlying, for 643 days (86.65%) middle contract is having value greater than the underlying and for 685 days (92.31%), far month contract is having value greater than the underlying of the total 742 days. Overall we can conclude that more than 85% percent number of days, since the contract prices are higher than the underlying asset prices, the contracts can be inferred to have Contango behavior. The mean prices of all the contracts across the observed period (Underlying: Rs 159.63, Near: Rs 159.96, Middle: 160.43, Far: Rs 161.54) and the underlying also depicts the same behavior, as in all the three contracts are showing a contango behavior. (***Calculations for Contango Behavior shown in Excel Sheet in Worked Out Futures sheets)

Contango For Far Month (Daily) 250

Price

200 150 100 50 0

Time Settle Price

Underlying Value

Similarly, all other graphs can be generated. All plots in Excel sheets. Contango Charts for Near, Next and Far month with Daily, Weekly and Monthly frequency help us derive the same conclusion as from the showed above.


23 Frequency significance: The frequency in itself shouldn’t matter as per the theory of stock prices being completely random (Random Walk Theory) and efficient market hypothesis. On average the return would be the same theoretically ignoring the transaction costs of each trade. The frequency is however important to the investor as the calculation of the Sharpe ratio depends on the standard deviation which depends on the frequency of duration. In our case the returns are higher with daily frequency and lowest with monthly frequency due to the rise being higher than the falls as and when they occur although the win loss ratio was almost random. This is however the characteristic of our data and should be taken as a rule of daily returns being higher than monthly returns or weekly returns. 

The returns with respect to the frequency (daily, weekly and monthly) vary very much. The daily returns are least volatile, whereas monthly returns are relatively more variable, at least in terms of the direction.



The sharp ratios of the underlying as well as the contract also depict the less variability of the daily returns. For daily returns, sharp ratio is more positive as compared to the daily calls.



For a hedger, hedging daily with a new contract is a wise option as they show the most Sharpe ratios. Hedging with a far month is not a very good option as it is relatively very less volatile (monthly frequency). Hedging with middle future contract is the best possible option a hedger can get, that too with monthly or weekly frequency but not daily.


24 SECTION-5 Options: The entire calculation for the given query has been done in the excel sheet. Procedure opted is as follows: 1. A given EXPIRATION date is chosen. 2. All options (European Call) with this expiration date and 90 day maturity time are considered. 3. The STRIKE PRICE with the highest OPEN INTEREST is chosen and analysed. 4. After getting the returns (of call premiums) volatility (standard deviation) is calculated. 5. This volatility is used to get the Black Scholes price of the next day (day next to our chosen expiration date) call option. If it doesn’t come out to be the same then an arbitrage opportunity exists. Check the EXCEL SHEET of OPTIONS for all calculations. The calculated CALL OPTION PRICE for 29th December 2017 = Rs. 15.64 The quoted CALL OPTION PRICE for 29th December 2017 = Rs. 6.95

This implies that the call option premium is selling for cheaper than it’s supposed to be sold. As such a perfect arbitrage opportunity exists with the two prices being unequal.

Action: As an active investor one is supposed to take a long position in the three-month call option trading at a strike price of Rs. 180 for a time period of 90 days. As arbitrage is exploited the call option price starts to rise thereby reaching to the theoretical amount of Rs. 15.56, creating excess returns when the position is closed out.


25 SECTION-6 Overall Conclusion

We find that although the Equity derivative instrument of equity and futures are being well managed by Bank of Baroda. The returns show somewhat opposite behavior Overall it has negative mean returns for daily, weekly and monthly frequencies thus not lending it enough credibility for investors to buy equity and trade in its futures. The risk associated with the trading is though not very high as we observe from the sufficiently low standard deviation values but the overall performance hasn’t been a worthy of emulation. The minimum and maximum returns of the company show a big range. The company has a rich heritage and a strong influence in the sphere of banking and overall economic growth of the country as well as we know from the history of the company and its position among the peers. It has low risk adjusted returns which indicating a poor market position. But company does have a positive net income and operating income which leads to better valuation of the company owing to good management. Mean Sharpe ratio is low but it has a good range with the maximum value reaching 9.4 which indicates good risk adjusted returns (when maximum). There are price fluctuations at the end/expiry dates of contracts but the company maintains a good liquidity and solvency ratio. It has low credit and business risk and futures instruments don’t have huge basis risks involved. As per the figures indicated by all the analysis done the company isn’t doing strong in the market. As such it would be better to trade in risk free securities than investing in the company stocks and futures. But options still seem a viable choice for trading among investor as visible by the open interest.


26 SECTION-7 References:           

wikipedia.com economictimes.com moneycontrol.com screener.in goodcalcualtors.com financialexpress.com images.google.com yahoofinance.com bloomberg.com NSE database Investopedia.com All charts drawn on Excel with data scraped from above mentioned sites. Tools used: 1) Python 2) MS Excel


27

An Analysis Report on Underlying Asset And Deliverable Equity Futures and Options By Rajat Mishra and Group 3 Under the supervision of Dr. Thota Nagaraju

Birla Institute of Technology and Science Pilani Hyderabad Campus (April 2018)

Course: Derivatives and Risk Management (DRM): ECON F354/FIN F311 Dated: 2nd April, 2018


28

Important points for further reference:  All the figures are rounded of to 4 decimal places.  For further accuracy, please refer to the excel sheets attached.  The graphs have percentage returns on y-axis and dates on x-axis.  Font size used:12  Font used: Cambria  References are attached at the end of the report.  Different companies analyzed one after the other in order.  Generalized summary attached at the end of the report.  Tools used: O Python (for data scraping) O Excel (for analysis)


29

Acknowledgements I would like to express my sincerest gratitude to Dr. Thota Nagaraju, for giving me an opportunity to work under his for this project and also taking his valuable time to provide me the required guidance wherever required. His input proved to be very vital for the project. I would like to thank him for providing us with such a wonderful opportunity to apply our course knowledge on real life data and get hands on experience. I am indebted for all his help and guidance throughout the course and this assignment.


30


Name

Rahul Balana

ID number

2016ABPS0642H

Serial number

112


31

TABLE OF CONTENTS SECTION 1: Equity Asset 1.1. Introduction to Equity Asset……………………………………………………………….………6 1.2. Unadjusted Returns Data……………………………………………………………………………8 1.3. Adjusted Returns Data………………………………………………………………………………..9 1.4. Economic Interpretation…………………………………………………………………………….10






SECTION 7: References 6 Conclusion …………………….......…………………….…………………………………………………...24


32 SECTION-1 1.1 Introduction to Equity Asset 6) Nature of Business: United Spirits is involved in the manufacture, sale and distribution of alcoholic beverages. The company has 18 brands that sell more than a million cases each year, of which 4 brands each sell more than 10 million cases annually. The company has made a mark on the world and been awarded local and international accolades. 7) Public/Private Ownership: Public Ownership: Diageo United Spirits is a subsidiary of Diageo. Diageo’s holds 54.8% of all shares of United Spirits. Holder Indian Promoter Public Institutions Public Non-Institutions (Table – 1)

% Share Holding 3.70% 58.48 27.60% 13.93%

No of Shares 5,372,083 84,984,429 40,106,108 20,237,206

8) Inception and Circumstances: 



 

The company originated as a trading company called McDowell and Company and was founded in 1826 (192 years ago) by Angus McDowell in India with its headquarters in Madras (now Chennai). The company imported liquor, tobacco products, and other consumer goods into India to serve the needs of the Maharajahs and British officials stationed there. In 1951, the company was acquired by Vithal Mallya. In 1959 the company established its first distillery Cherthala, on the banks of Vembanad Lake in Kerela diversifying into the production of alcoholic beverages. In 1963 the company launched its own beverage brand called McDowell’s No. 1 Brandy. In 1973, Vijay Mallya, the son of Vithal Mallya is inducted as Director in McDowell & Co. The board unanimously appoints Dr. Vijay Mallya as the Chairman of McDowell’s in 1983 after the demise of Vithal Mallya. In 1992, the company formed a joint venture, United Distillers India Limited, with United Distillers plc of UK. In 2006 United Spirits Limited, is created through the merger of McDowell & Co Limited, Herbertsons Limited, Triumph Distillers and Vintners Private


33  

Limited, Baramati Grape Industries India Limited, Shaw Wallace Distilleries Limited and four other companies. In 2013-14, Diageo plc acquires 54.8% shareholding in United Spirits making India one of its largest markets. Currently, United Spirits Limited (USL) is a subsidiary of Diageo plc which is a global leader in beverage alcohol with an outstanding collection of brands across spirits, beer and wine categories.

9) Industry and Significance in Industry:  

10) • • • • • • •

United Spirits belongs to the alcoholic beverages industry. The company has 18 brands that sell more than a million cases each year, of which 4 brands each sell more than 10 million cases annually.

Overall greatness of the company: World’s second-largest spirits company by volume Subsidiary of Diageo (a multinational alcoholic beverages company) Has more than 140 liquor brands “McDowell's No.1” beverage is ranked 14 in the 2015 BrandZ™ “Top 50 Most Valuable Indian Brands” rankings. One of the company’s beverage won the Platinum medal in 2006 World Beverage Competiton and has won several other awards since then, Has positive operating profit and net profit of Rs 989.20 crore and Rs 93.00 crore in the last Financial year (FY2016-17). The company acquired Carew & Co and Phipson & Co, manufacturers of rum, gin, and other hard liquors. in 1963–64, bought out Herbertsons in 1973, acquired the spirits business and manufacturing facility of Forbes Campbell & Company Limited. and made many other mergers and acquisitions over time to become the second-largest spirits company by volume.

-10

-5

-10

-15

-20

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

-5


Returns(%)

Returns (%)


34


Table 2 (Returns vs Time)

Returns (frequency) Mean Max Min Variance Standard Deviation Daily -0.0153 16.1445 -7.9148 4.9570 2.2264

Weekly 0.0216 18.5373 -13.9970 24.8376 4.9838

Date

Monthly -0.0416 22.9650 -16.9476 93.4074 9.6647

Daily Risk Unadjusted Returns (%) vs Time

20

15

10

5

0

Date

Weekly Risk Unadjusted Returns (%) vs Time

30

25

20

15

10

5

0

Returns (%) -5

-15

-10

-5

-15

01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

-10

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Returns (%)


35

Monthly Risk Unadjusted Returns (%) vs Time

25

20

15

10

5

0

-20

-25

Date


Table 3 (Returns vs Time)

Returns (frequency) Mean Max Min Variance Standard Deviation Daily Weekly

-0.0350 16.1257 -7.9361 4.9573 2.2265

Date

Monthly

-0.1165 18.4054 -14.1349 24.8487 4.9848 -0.0612 22.9462 -16.9649 93.4131 9.6650

Daily Risk Adjusted Returns(%) vs Time

30

25

20

15

10

5

0

Returns (%) -10

-20

Date

25 20 15 10 5 0 -5 -10 -15 -20 -25 -30

01 April 2015 01 May 2015 01 June 2015 01 July 2015 01 August 2015 01 September… 01 October 2015 01 November… 01 December… 01 January 2016 01 February 2016 01 March 2016 01 April 2016 01 May 2016 01 June 2016 01 July 2016 01 August 2016 01 September… 01 October 2016 01 November… 01 December… 01 January 2017 01 February 2017 01 March 2017 01 April 2017 01 May 2017 01 June 2017 01 July 2017 01 August 2017 01 September… 01 October 2017 01 November… 01 December… 01 January 2018

0

01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Reurns(%)


36

Weekly Risk Adjusted Return (%) vs Time

30

20

10

Monthly Risk Adjusted Returns (%) vs Time

Date

1.4 Economic Interpretation:



37


Sharpe Ratio -0.0157 -0.0234 -0.0661

(Table – 4)

Equity 0 Daily

Weekly

Monthly

-0.01

Sharpe Ratio

-0.02 -0.03 -0.04 -0.05 -0.06 -0.07

Observations:  The volatility and standard deviation is almost similar in risk unadjusted returns and in risk adjusted returns.  The percentage of mean returns decreases from weekly to daily to monthly in risk unadjusted returns.


38   

The percentage of mean returns decreases from daily to monthly to weekly in risk adjusted returns. The volatility is increasing from daily, weekly to monthly in risk unadjusted returns. The volatility is increasing from daily, weekly to monthly in risk adjusted returns.

Action: 

 

Therefore, for a risk-loving investor, it is not a suitable option is to follow a Monthly or a Weekly Investment Schedule, since they involves taking higher risk (due to greater time period), and instead gives lower (mean) returns than the Daily investment alternatives. It’s rather better to follow a short term investment schedule and carry on with day trading than invest in longer periods of weekly or monthly periods. However, since all returns are negative it would be wiser to invest in T-bills than in equity for the given time period.

SECTION 2: 2.1 Introduction to Equity Futures Instrument 3) Inception of Futures: The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark Nifty 50 Index. The Exchange introduced trading in Index Options (also based on Nifty 50) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 175 securities stipulated by SEBI. The United Spirits Futures Trading commenced from February 26th, 2016.


39 4) Contract specifications: Given below are the contract specifications for the futures contracts. Since, it is an equity derivative, there is no physical delivery location. However, the lot size is fixed as 3500 shares per lot. Therefore, it is not as lucrative for small, individual traders who wish to trade in smaller lot sizes. However big investment traders can find it easy to trade with the lot size being only 3500 which is still relatively less than other futures stocks of the peer groups. (Table 6) Symbol Instrument Lot Size Price Steps Price Bands Trading Cycle Trading hours Expiry date Daily settlement price Final settlement price

MCDOWELL-N FUSTK (futures stock) 250 shares Rs.0.05 Operating range of 10% of the base price 3 months – Near, next far As in equity derivative segment Last Thursday of expiry month Last half hour's weighted average price closing price of underlying equity on the last trading day of the contract

Details as on 28th March, 2018: • Traded Volume (contracts) • Traded Value * (lacs) • Underlying value • Market Lot • Open Interest • Change in Open Interest • Settlement Price

4,412 34,836.15 3,129.65 250 1,35,750 -5,77,000 3129.65

2.2/2.3 Returns Data (Unadjusted and Adjusted) (*Table number indicated in brackets)

Near Month (7): - Risk Unadjusted Returns Returns Daily (frequency) Mean Max Min Standard Deviation

Weekly

Monthly

0.0377 16.9248 -7.0026

0.1781 20.9529 -12.4903

0.9040 24.7449 -16.2525

2.1537

5.3940

10.3116


40 Near Month (8) Risk Adjusted Returns Returns Daily Weekly Monthly (frequency) Mean 0.0188 0.0526 0.4586 Max 16.9061 20.8229 24.1896 Min -7.0213 12.6233

Standard Deviation

2.1537

5.3920

-16.8187 10.2876

Next Month (9):- Risk Unadjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Daily

Weekly

Monthly

0.0386 16.2305 -7.0009

0.1821 20.3475 -12.4270

0.9001 24.0537 -16.8086

2.1461

5.3492

10.1406

(10)Risk Adjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Daily

Daily

Weekly

Monthly

0.0196 16.2119 -7.0196

0.0566 20.2175 -12.5599

0.4547 23.4985 -17.3748

2.1461

5.3472

10.1166

Far Month (11): - Risk Unadjusted Returns Returns (frequency) Mean Max Min Standard Deviation

Weekly


Monthly

0.0381 16.7382 -7.2762

0.1797 20.6826 -12.6362

0.9195 24.0587 -16.8002

2.1730

5.4206

10.1943

Returns (frequency) Mean Max Min Standard Deviation

Underlying (13): - Risk Unadjusted Returns: same as Table 2 Underlying (14) Risk Adjusted Returns: same as Table 3

Daily

Weekly

Monthly

0.0191 16.7196 -7.2960

0.0542 20.5526 -12.7691

0.4742 23.5034 -17.3663

2.1730

5.4186

10.1694


41 Graphs depicting Adjusted Returns of Near Month Futures Contracts Data:

Daily Risk Adjusted Returns (%) v/s Time 20

Returns (%)

15 10 5 0 -5 -10

Date

Weekly Risk Adjusted Returns (%) v/s Time 30

Returns (%)

20 10 0 -10 -20

Date

Monthly Risk Adjusted Returns (%) v/s Time 30

Returns (%)

20 10 0 -10 -20

Date


42 Graphs depicting Adjusted Returns of NEXT Month Futures Contracts Data:

Daily Risk Adjusted Returns (%) v/s Time 20 10 5

Weekly Risk Adjusted Returns (%) v/s Time Returns (%)

30 20 10 0 -10 -20

Date

Monthly Risk Adjusted Returns (%) v/s Time Returns (%)

30 20 10 0 -10 -20

Date

31-Dec-17

30-Nov-17

31-Oct-17

30-Sep-17

31-Aug-17

31-Jul-17

30-Jun-17

31-May-17

30-Apr-17

Date

31-Mar-17

28-Feb-17

31-Jan-17

31-Dec-16

30-Nov-16

31-Oct-16

30-Sep-16

31-Aug-16

31-Jul-16

30-Jun-16

31-May-16

-10

30-Apr-16

-5

31-Mar-16

0

29-Feb-16

Returns (%)

15


43 Graphs depicting Adjusted Returns of FAR Month Futures Contracts Data:

Daily Risk Adjusted Returns (%) v/s Time Returns (%)

20 10 0 -10 Date

Weekly Risk Adjusted Returns (%) v/s Time Returns (%)

30 20 10 0 -10 -20

Date

Returns (%)

Monthly Risk Adjusted Returns (%) v/s Time 30 25 20 15 10 5 0 -5 -10 -15 -20

Date


44 2.3 Economic Interpretation

Observations: 







The percentage of mean returns increases from daily, weekly to monthly in both risk unadjusted and risk adjusted returns.









Trend in Returns: Far>Next>Near

Action: 

Therefore, both risk-averse and risk-loving investors are advised to follow monthly investment schedule to get greater returns with lesser risk.



A hedging investor is also advised to follow monthly investment schedule, earning higher returns at lower risk.



However, more contracts are traded for Near months than Next and Far months which make them a better choice to trade in (point clarified ahead).



Since all mean returns are positive it would be wiser to invest in futures than in T-bills for the given time period.


45 SECTION-3

COMPARISONS: 

Volatility increases from Near, Next to Far month, however, the mean monthly returns (both risk adjusted and risk unadjusted) have remained almost same from Near, Next to Far month, as well as Underlying asset.






The returns increased but the volatility also increased from Daily, Weekly to Monthly Frequency.



For a hedging investor who would like to minimize risk it is advised to take up a monthly investment schedule, earning better returns at low risk.



Even for a risk-loving investor it is advisable to take up a monthly investment schedule, earning high returns at lower risk.

Comparative Results 0.6 0.4

Return (%)

0.2 Daily

0 Equity -0.2

Near

Next

Far

Weekly Monthly

-0.4 -0.6 -0.8

We use the above generated figure to compare the far and middle derivative with near futures and equity returns. We face negative returns on equity on a daily, weekly and monthly frequency trading. The losses in case of equity are highest in monthly case. The mid and far


46 perform almost equal to Near and equity due to lower volatility in our data. Daily trading gives us modest positive returns. We perform well on a monthly basis using Futures generating a risk adjusted return of greater than 0.4%, Far futures being our best performer by return. In conclusion, near month future is our best performer while equity is our worst performer (We choose middle over far due to low liquidity and high transaction cost). To take the advantage of leverage we would choose Near month futures. In conclusion, both Near and Middle have performed better than far future and equity instruments.


Near

Next 3,543 20,98,868

Far 698 3,63,616

733 3,37,549




  



47 SECTION-4

3.3 Contango or Backwardation Trends: Contango is a situation where the futures price of a commodity is above the expected future spot price while Backwardation refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. During the period of observation, for 423 days (88.49%) near contract is greater than underlying, for 465 days (97.28%) middle contract is having value greater than the underlying and for 467 days (97.70%), far month contract is having value greater than the underlying of the total 478 days. Overall we can conclude that more than 88% percent number of days, since the contract prices are higher than the underlying asset prices, the contracts can be inferred to have Contango behavior. The mean prices of all the contracts across the observed period (Underlying: Rs 2470.01, Near: Rs 2476.60, Middle: Rs. 2515.21, Far: Rs 2499.99) and the underlying also depicts the same behavior, as in all the three contracts are showing a contango behavior. (***Calculations for Contango Behavior shown in Excel Sheet in Worked Out Futures sheets)

Frequency significance: The frequency in itself shouldn’t matter as per the theory of stock prices being completely random (Random Walk Theory) and efficient market hypothesis. On average the return would be the same theoretically ignoring the transaction costs of each trade. The frequency is however important to the investor as the calculation of the Sharpe ratio depends on the standard deviation which depends on the frequency of duration. In our case the returns are higher with daily frequency and lowest with monthly frequency due to the rise being higher than the falls as and when they occur although the win loss ratio was almost random. This is however the characteristic of our data and should be taken as a rule of daily returns being higher than monthly returns or weekly returns. 




The Sharpe ratios of the underlying as well as the contract also depict the less variability of the daily returns. For daily returns, Sharpe ratio is more positive as compared to the daily calls.



For a hedger, hedging daily with a new contract is a wise option as they show the most Sharpe ratios. Hedging with a far month is not a very good option as it is relatively very less volatile


48 (monthly frequency). Hedging with middle future contract is the best possible option a hedger can get, that too with monthly or weekly frequency but not daily.

SECTION-5 Options: The entire calculation for the given query has been done in the excel sheet. Procedure opted is as follows: 6. A given EXPIRATION date is chosen. 7. All options (European Call) with this expiration date and 90 day maturity time are considered. 8. The STRIKE PRICE with the highest OPEN INTEREST is chosen and analysed. 9. After getting the returns (of call premiums) volatility (standard deviation) is calculated. 10. This volatility is used to get the Black Scholes price of the next day (day next to our chosen expiration date) call option. If it doesn’t come out to be the same then an arbitrage opportunity exists. Check the EXCEL SHEET of OPTIONS for all calculations. The calculated CALL OPTION PRICE for 29th December 2017 = Rs. 346.57 The quoted CALL OPTION PRICE for 29th December 2017 = Rs. 341.8 This implies that the call option premium is selling for cheaper than it’s supposed to be sold. As such a perfect arbitrage opportunity exists with the two prices being unequal.


49



50 SECTION-6 Overall Conclusion We find that the Equity derivative instrument of equity and futures are being well managed by United Spirits. The returns (for futures) show positive mean returns for daily, weekly and monthly frequencies thus lending it enough credibility for investors to trade in its futures. Return on equity, however, is not up to the mark and its performance in equity trade hasn’t been worthy of emulation. The company has a rich heritage and a strong influence in the sphere of alcoholic and beverages industry and overall economic growth of the country as well. The company has a positive net income and operating income which leads to better valuation of the company owing to good management. It has low risk adjusted returns in equity which indicates a poorer market position. Mean Sharpe ratio is low but it has a good range with the maximum value reaching 7.2 which indicates good risk adjusted returns (when maximum). There are price fluctuations at the end/expiry dates of contracts but the company maintains a good liquidity and solvency ratio. It has low credit and business risk and futures instruments don’t have huge basis risks involved. As per the figures indicated by all the analysis done the company has a lucrative position in the market. One can trade in futures and earn more returns as compared to risk free securities. Options are also a viable choice for trading among investors as visible by the open interest.


51

AN ANALYSIS REPORT ON UNDERLYING ASSET AND DELIVERABLE EQUITY FUTURES AND OPTIONS BY ABRAHAM TONY JO AND GROUP 3 Under the supervision of DR. THOTA NAGARAJU


COURSE- DERIVATIVES AND RISK MANAGEMENT (DRM): ECON F354 Dated: 2nd April, 2018


52











FONT SIZE USED:12



FONT USED: CAMBRIA



















54


Name

Abraham Tony Jo

ID number

2015A4PS0378H

Serial number

5


55 TABLE OF CONTENTS SECTION 1: Equity Asset 1.1. Introduction to Equity Asset……………………………………………………………….……….6 1.2. Unadjusted Returns Data…………………………………………………………………………….10 1.3. Adjusted Returns Data………………………………………………………………………………..11 1.4. Economic Interpretation…………………………………………………………………………….12







56 SECTION-1 1.1 Introduction to Equity Asset

11)

Nature of Business:

Bata India Limited is involved in the following activities.  

Manufacturing and trading of footwear Investments in joint venture for Surplus property development

Bata India Ltd is engaged in manufacturing and trading of footwear and accessories through their retail and wholesale network. The company operates in two segments, namely footwear & accessories, and investments in joint venture for surplus property development.. Their Investment in joint venture for surplus property development segment is involved in development of real estate at Batanagar. Their products include leather footwear, rubber/canvas footwear and plastic footwear. 12)

Public/Private Ownership:

Incorporated as Bata Shoe Company Private Limited in 1931, the company went public in 1973 when it changed it’s name to Bata India Limted. Name Bata Industries Ltd.

Equities

%

68,065,514 53.0%

Life Insurance Corp. of India

5,987,026 4.66%

Kotak Mahindra Asset Management Co. Ltd.

4,468,798 3.48%

Aditya Birla Sun Life AMC Ltd.

4,225,214 3.29%

Franklin Templeton Asset Management (India) Pvt Ltd.

3,872,614 3.01%

FIL Investment Management (Hong Kong) Ltd.

2,701,263 2.10%

IDFC Asset Management Co. Ltd.

1,561,455 1.21%

Kotak Mahindra Life Insurance Co., Ltd.

1,299,889 1.01%

Tata Asset Management Ltd.

1,278,000 0.99%

HDFC Asset Management Co. Ltd. (Invt Mgmt)

1,226,600 0.95%


57 13)

Inception and Circumstances:

Bata private shoe company was incorporated in the year 1931. Bata Shoe Company Pvt Ltd in Konngar, West Bengal, which was then shifted to Batanagar. The company went public in 1973, and changed their name to Bata India Limited.

14)

Industry and Significance in Industry:

Shoe manufacturing and sale. Provides banking services to consumers and corporate companies. It provides private equity to buy, Mortgage loans, insurances, investment banking solutions, credit cards and wealth management services. India’s largest shoemaker in all respects.


58 15)

Overall greatness of the company:

.

Other awards: 





The company bagged the Retailer of the year award for the year 2006 in the footwear category as a part of the Reid and Taylor Award for Retail Excellence which was presented during the Indian Retail Summit 2006. They received the country's most coveted Retail Award at the 4th Images Retail Awards (IRA) 2007. The company was honoured with Most Admired Brand of the year 2006-07 in Footwear category. They were rated as one of the Top 10 super brands in India and awarded Super Brands Award on April 12, 2007. In February 21, 2008, they were given AMITY Corporate Excellence Award 2008. This award was given for Bata's excellent performance and retail growth during 2007. In the year 2010, the company won the 'Consumer Awards 2010' as 'India's Most Preferred Retailer' given by CNBC Awaaz. The company opened 108 new large format stores across all major towns in India.



59 TABLE 2 (Returns Vs Time) Returns (frequency)

Daily

Weekly

Monthly

Mean

0.0368

0.1576

0.9876

Max

7.0417

10.5399

16.1772

Min

-10.056

-13.187

-14.617

Standard Deviation

1.78773

3.8537

8.57685

Daily Unadjusted Returns Vs Time 10

0 -5 -10

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Returns (%)

5

-15

Date

Weekly Risk Unadjusted Returns Vs Time 15

Returns (%)

10 5 0 -5 -10 -15

Date

Returns (%) -10

-5

-10

-15

01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

-5

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Returns (%)


60

Monthly Unadjusted Returns Vs Time

20

15

10

5

0

-15

-20

Date


Table (3)

Returns (frequency) Mean Daily Weekly Monthly

0.01712 0.0194 0.39024

Max 7.02042 10.3908 15.622

Min -10.077 -13.3312 -15.183

Standard Deviation 1.78779 3.8548 8.58561

Daily Risk Adjusted Returns Vs Time

10

5

0

Date

Returns (%) -5

-10

17-04-2015 17-05-2015 17-06-2015 17-07-2015 17-08-2015 17-09-2015 17-10-2015 17-11-2015 17-12-2015 17-01-2016 17-02-2016 17-03-2016 17-04-2016 17-05-2016 17-06-2016 17-07-2016 17-08-2016 17-09-2016 17-10-2016 17-11-2016 17-12-2016 17-01-2017 17-02-2017 17-03-2017 17-04-2017 17-05-2017 17-06-2017 17-07-2017 17-08-2017 17-09-2017 17-10-2017 17-11-2017 17-12-2017 17-01-2018

-5

01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

Return (%)


61

Weekly Risk Adjusted Return Vs Time

15

10

5

0

-10

-15

Date

Monthly Risk Adjusted Returns Vs Time

20

15

10

5

0

-15

-20

Time

1.4 Economic Interpretation:



62


Sharpe Ratio -0.0096 -0.0050 -0.0455

(TABLE 4) Shoes the variation of Sharpe Ratio with Time Points are Daily, Weekly and Monthly from left to right.

Equity 0 -0.005

0

-0.01 -0.015 -0.02 -0.025 -0.03 -0.035 -0.04 -0.045 -0.05

Observations:

0.5

1

1.5

2

2.5

3

3.5


63    

The volatility and standard deviation is almost similar in risk unadjusted returns and in risk adjusted returns. The percentage of mean returns increases from daily, weekly to monthly in both risk unadjusted and risk adjusted returns. The volatility is increasing from daily, weekly to monthly in risk unadjusted returns. The volatility is increasing from daily, weekly to monthly in risk adjusted returns.

Action: 

 

Therefore, for a risk-loving investor, it is not a suitable option is to follow a Monthly Investment Schedule, since it involves taking higher risk (due to greater time period), and is instead gives lower (mean) returns than the Daily and Weekly investment alternatives, even though they present lower risk. Its rather better to follow a short term investment schedule and carry on with day trading than invest in longer periods of weekly or monthly periods. But since all returns are negative it would be wiser to invest in T-bills than in equity for the given time period.

SECTION-2 2.1 Introduction to Equity Futures Instrument 5) Inception of Futures: The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark Nifty 50 Index. The Exchange introduced trading in Index Options (also based on Nifty 50) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 175 securities stipulated by SEBI. The BataIndia Futures Trading commenced from November 7th, 2003.. Since then, the trading volume has been growing at an exponential rate. The trading in the futures is currently more than the trading in the corresponding underlying stock, which is a notable point.

6) Contract specifications:


64 Given below are the contract specifications for the futures contracts. Since, it is an equity derivative, there is no physical delivery location. However, the lot size is fixed as 3500 shares per lot. Therefore, it is not as lucrative for small, individual traders who wish to trade in smaller lot sizes. However big investment traders can find it easy to trade with the lot size being only 3500 which is still relatively less than other futures stocks of the peer groups. (TABLE 6) Symbol Instrument Lot Size Price Steps Price Bands Trading Cycle Trading hours Expiry date Daily settlement price Final settlement price

Current details: • Traded Volume (shares) • Traded Value * (lacs) • VWAP • Underlying value • Market Lot

BATAINDIA FUSTK (futures stock) 1100 shares Rs.0.05 657 and 802.90 (upper and lower bands) 3 months – Near, next far As in equity derivative segment Last Thursday of expiry month Last half hour's weighted average price closing price of underlying equity on the last trading day of the contract

471951 3511.36 744.15 745.20 1100

Settlement Price

745.25

Daily Volatility

3.09

Annualised Volatility

59.08

Client Wise Position Limits Market Wide Position Limits

95,16,689 19,03,33,797

(TABLE 7)

2.2/2.3 Returns Data (Unadjusted and Adjusted) (*Table number indicated in brackets)

Near Month (8): - Risk Unadjusted Returns


65 Frequency Mean Max Min Standard Deviation

Daily Weekly Monthly -0.06303 -0.359425 -1.1044559 8.8694 59.005731 16.2410738 -69.8844 -74.10713 -78.398787 3.227846

10.12831 16.3469639

(9)Risk Adjusted Returns Frequency Mean Max Min Standard Deviation

Daily Weekly Monthly -0.08228 -0.497993 -3.0876777 8.848238 58.854558 15.0824218 -69.9051 -74.25515 -79.02712 3.227911 10.129231 16.1448764

Next Month (10):- Risk Unadjusted Returns Frequency Mean Max Min Standard Deviation

Daily Weekly Monthly -0.06752 -0.319886 #DIV/0! 0 6.610661 16.218163 0 -70.472 -66.49503 3.334145 6.9968988

#DIV/0!

(11)Risk Adjusted Returns Frequency Mean Max Min Standard Deviation

Daily Weekly Monthly -0.08198 -0.398554 -1.7026628 6.589492 16.069587 15.5538683 -70.4926 -66.6434 -73.714539 3.331849 6.9879503

15.4998239

Far Month (12): - Risk Unadjusted Returns


66 Frequency Mean Max Min Standard Deviation


16.9079342

(13) Risk Adjusted Returns Frequency Mean Max Min Standard Deviation


17.1968768

Underlying (14): - Risk Unadjusted Returns


Table 14 is same as Table 2 Table 15 is same as Table 3

Graphs depicting Adjusted Returns of NEAR Month Futures Contracts Data: Daily Risk Adjusted Returns (Near) 20 10

-30 -40 -50 -60 -70 -80

31-01-2018

31-12-2017

30-11-2017

31-10-2017

30-09-2017

31-08-2017

31-07-2017

30-06-2017

31-05-2017

30-04-2017

31-03-2017

28-02-2017

31-01-2017

31-12-2016

30-11-2016

31-10-2016

30-09-2016

31-08-2016

31-07-2016

30-06-2016

31-05-2016

30-04-2016

31-03-2016

29-02-2016

31-01-2016

31-12-2015

30-11-2015

31-10-2015

30-09-2015

31-08-2015

31-07-2015

30-06-2015

31-05-2015

-20

30-04-2015

-10

31-03-2015

0

-20.000000

-40.000000

-60.000000

-80.000000

-100.000000

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018


67

Adjusted Returns vs time

80

60

40

20

0 10-04-2015 -20

-40

-60

-80

-100

Monthly Adjusted returns (Near)vs time

20.000000

0.000000

30.000000 20.000000 10.000000 0.000000 -10.000000 -20.000000 -30.000000 -40.000000 -50.000000 -60.000000 -70.000000 -80.000000

10-Nov-17

10-Oct-17

10-Sep-17

10-Aug-17

10-Jul-17

10-Jun-17

10-May-17

10-Apr-17

10-Mar-17

10-Feb-17

10-Jan-17

10-Dec-16

10-Nov-16

10-Oct-16

10-Sep-16

10-Aug-16

10-Jul-16

10-Jun-16

10-May-16

10-Apr-16

10-Mar-16

10-Feb-16

10-Jan-16

10-Dec-15

10-Nov-15

10-Oct-15

10-Sep-15

10-Aug-15

10-Jul-15

10-Jun-15

10-Jan-18

Monthly Adjusted returns (Next) vs time

01-Jan-18

-80

10-Dec-17

-60

01-Dec-17

01-Nov-17

01-Oct-17

01-Sep-17

01-Aug-17

01-Jul-17

01-Jun-17

01-May-17

01-Apr-17

01-Mar-17

01-Feb-17

01-Jan-17

01-Dec-16

01-Nov-16

01-Oct-16

01-Sep-16

01-Aug-16

01-Jul-16

01-Jun-16

01-May-16

01-Apr-16

01-Mar-16

01-Feb-16

01-Jan-16

01-Dec-15

01-Nov-15

01-Oct-15

01-Sep-15

01-Aug-15

01-Jul-15

01-Jun-15

-40

01-May-15

-20

01-Apr-15

-30

10-May-15

-20

31-01-2018

31-12-2017

30-11-2017

31-10-2017

30-09-2017

31-08-2017

31-07-2017

30-06-2017

31-05-2017

30-04-2017

31-03-2017

28-02-2017

31-01-2017

31-12-2016

30-11-2016

31-10-2016

30-09-2016

31-08-2016

31-07-2016

30-06-2016

31-05-2016

30-04-2016

31-03-2016

29-02-2016

31-01-2016

31-12-2015

30-11-2015

31-10-2015

30-09-2015

31-08-2015

31-07-2015

30-06-2015

31-05-2015

30-04-2015

31-03-2015

-10

10-Apr-15


68

Daily Risk Adjusted Returns (Next) vs time

20

10

0

-40

-50

-60

-70

-80

Weekly Adjusted Returns (Next) vs time

40

20

0

-20.000000

-40.000000

-60.000000

-80.000000

-100.000000

10-08-2017

10-07-2017

10-06-2017

10-05-2017

10-04-2017

10-03-2017

10-02-2017

10-01-2017

10-12-2016

10-11-2016

10-10-2016

10-09-2016

10-08-2016

10-07-2016

10-06-2016

10-05-2016

10-04-2016

10-03-2016

10-02-2016

10-01-2016

10-12-2015

10-11-2015

10-10-2015

10-09-2015

10-08-2015

10-07-2015

10-06-2015

10-05-2015

10-01-2018

0.000000

01-Dec-17

20.000000

10-12-2017

40.000000

01-Nov-17

Monthly Adjusted returns (Far)vs time 10-11-2017

-80

01-Oct-17

-70

10-10-2017

-60

01-Sep-17

-50

10-09-2017

-40

01-Aug-17

01-Jul-17

01-Jun-17

01-May-17

01-Apr-17

01-Mar-17

01-Feb-17

01-Jan-17

01-Dec-16

01-Nov-16

01-Oct-16

01-Sep-16

01-Aug-16

01-Jul-16

01-Jun-16

01-May-16

01-Apr-16

01-Mar-16

01-Feb-16

01-Jan-16

01-Dec-15

01-Nov-15

01-Oct-15

01-Sep-15

01-Aug-15

01-Jul-15

01-Jun-15

-30

01-May-15

-20

01-Apr-15

-10

Weekly Adjusted Returns (Far) vs time

20

10

0

31-Jan-18

31-Dec-17

30-Nov-17

31-Oct-17

30-Sep-17

31-Aug-17

31-Jul-17

30-Jun-17

31-May-17

30-Apr-17

31-Mar-17

28-Feb-17

31-Jan-17

31-Dec-16

30-Nov-16

31-Oct-16

30-Sep-16

31-Aug-16

31-Jul-16

30-Jun-16

31-May-16

30-Apr-16

31-Mar-16

29-Feb-16

31-Jan-16

31-Dec-15

30-Nov-15

31-Oct-15

30-Sep-15

31-Aug-15

31-Jul-15

30-Jun-15

31-May-15

30-Apr-15

31-Mar-15

20 10 0 -10 -20 -30 -40 -50 -60 -70 -80

10-04-2015


69

Daily Risk Adjusted (Far)Returns


70 2.3 Economic Interpretation Observations: 







The percentage of mean returns decrease from daily, weekly to monthly in risk unadjusted returns in both risk unadjusted and risk adjusted returns.









Trend in Returns: Near>Next>Far

Action: 

Therefore, both risk-averse and risk-loving investors are advised to follow daily investment schedule to get greater returns with lesser risk.



A hedging investor is also advised to follow daily investment schedule, earning higher returns at lower risk.



Further, more contracts are traded for Near months than Next and Far months wich make them a bettr choice to trade in (point clarified ahead).



But since all returns are negative it would be wiser to invest in T-bills than in equity for the given time period.


71

SECTION-3

COMPARISONS: 

Volatility increases from Near, Next to Far month, however, the mean daily returns (both risk adjusted and risk unadjusted) have remained almost same from Near, Next to Far month, as well as Underlying asset.






The returns decreased but the volatility increases from Daily, Weekly to Monthly Frequency.



Therefore for a hedging investor who would like to minimize risk it is advised to take up a daily investment schedule, earning better returns at low risk.



Even for a risk-loving investor it is advisable to take up a daily investment schedule, earning high returns at lower risk.

(1= Equity

2=Near

3=Next

4=Far)

We use the above generated figure to compare the far and middle derivative with near futures and equity returns. We face negative returns on all four instruments on a weekly and monthly frequency trading. The losses in case of near month future is highest in monthly case. The mid


72 and far perform almost equal to Near and equity due to lower volatility in our data. Dailly trading gives us modest positive returns. Near and Mid give returns almost equal to equity but far being illiquid doesn’t generate much return in daily and weekly basis. The closing prices for far month don’t vary much. We perform well on a daily basis generating a risk adjusted return of -0.0818% on average, Near futures being our best performer by return and far month future being best by Sharpe ratio. In conclusion, near month future is our best performer while equity is our worst performer (We choose middle over far due to low liquidity and high transaction cost). To take the advantage of leverage we would choose Near month futures. In conclusion, both Near and Middle have performed better than far and equity months.


Near

Next 8749 38636869

Far 1596 6246876

12 97376




  



73 SECTION-4

3.3 Contango or Backwardation Trends: Contango is a situation where the futures price of a commodity is above the expected future spot price while Backwardation refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. During the period of observation, for 636 days (85.81%) near contract is greater than underlying, for 643 days (86.65%) middle contract is having value greater than the underlying and for 685 days (92.31%), far month contract is having value greater than the underlying of the total 742 days. Overall we can conclude that more than 85% percent number of days, since the contract prices are higher than the underlying asset prices, the contracts can be inferred to have Contango behavior. The mean prices of all the contracts across the observed period (Underlying: Rs 159.63, Near: Rs 159.96, Middle: 160.43, Far: Rs 161.54) and the underlying also depicts the same behavior, as in all the three contracts are showing a contango behavior. (***Calculations for Contango Behavior shown in Excel Sheet in Worked Out Futures sheets)

Graph For Contango/Backwardation

31-03-2015 30-04-2015 31-05-2015 30-06-2015 31-07-2015 31-08-2015 30-09-2015 31-10-2015 30-11-2015 31-12-2015 31-01-2016 29-02-2016 31-03-2016 30-04-2016 31-05-2016 30-06-2016 31-07-2016 31-08-2016 30-09-2016 31-10-2016 30-11-2016 31-12-2016 31-01-2017 28-02-2017 31-03-2017 30-04-2017 31-05-2017 30-06-2017 31-07-2017 31-08-2017 30-09-2017 31-10-2017 30-11-2017 31-12-2017 31-01-2018

1400 1200 1000 800 600 400 200 0

Close

near

next

far

Similarly, all other graphs can be generated. All plots in Excel sheets. Contango Charts for Near, Next and Far month with Daily, Weekly and Monthly frequency help us derive the same conclusion as from the showed above.


74 Frequency significance: The frequency in itself shouldn’t matter as per the theory of stock prices being completely random (Random Walk Theory) and efficient market hypothesis. On average the return would be the same theoretically ignoring the transaction costs of each trade. The frequency is however important to the investor as the calculation of the Sharpe ratio depends on the standard deviation which depends on the frequency of duration. In our case the returns are higher with daily frequency and lowest with monthly frequency due to the rise being higher than the falls as and when they occur although the win loss ratio was almost random. This is however the characteristic of our data and should be taken as a rule of daily returns being higher than monthly returns or weekly returns. 




The sharp ratios of the underlying as well as the contract also depict the less variability of the daily returns. For daily returns, sharp ratio is more positive as compared to the daily calls.



For a hedger, hedging daily with a new contract is a wise option as they show the most Sharpe ratios. Hedging with a far month is not a very good option as it is relatively very less volatile (monthly frequency). Hedging with middle future contract is the best possible option a hedger can get, that too with monthly or weekly frequency but not daily.

SECTION-5 Options: The entire calculation for the given query has been done in the excel sheet. Procedure opted is as follows: 11. A given EXPIRATION date is chosen.


75 12. All options (European Call) with this expiration date and 90 day maturity time are considered. 13. The STRIKE PRICE with the highest OPEN INTEREST is chosen and analysed. 14. After getting the returns (of call premiums) volatility (standard deviation) is calculated. 15. This volatility is used to get the Black Scholes price of the next day (day next to our chosen expiration date) call option. If it doesn’t come out to be the same then an arbitrage opportunity exists. Check the EXCEL SHEET of OPTIONS for all calculations.

This implies that the call option premium is selling for cheaper than it’s supposed to be sold. As such a perfect arbitrage opportunity exists with the two prices being unequal.

Stock Price Strike Price risk free rate time volatility dividend yield

747.29 760 0.064 0.25 years 0.681 0.48%

The calculated CALL OPTION PRICE for 29th December 2017 = Rs. 26.64 The quoted CALL OPTION PRICE for 29th December 2017 = Rs. 22.95


SECTION-6 Overall Conclusion

We find that although the Equity derivative instrument of equity and futures are being well managed by Bata India. The returns show somewhat opposite behavior Overall it has negative mean returns for daily, weekly and monthly frequencies thus not lending it enough credibility for investors to buy equity and


76 trade in its futures. The risk associated with the trading is though not very high as we observe from the sufficiently low standard deviation values but the overall performance hasn’t been a worthy of emulation. The minimum and maximum returns of the company show a big range. The company has a rich heritage and a strong influence in the sphere of maufacturing and overall economic growth of the country as well as we know from the history of the company and its position among the peers. It has low risk adjusted returns which indicating a poor market position. But company does have a positive net income and operating income which leads to better valuation of the company owing to good management. There are price fluctuations at the end/expiry dates of contracts but the company maintains a good liquidity and solvency ratio. It has low credit and business risk and futures instruments don’t have huge basis risks involved. As per the figures indicated by all the analysis done the company isn’t doing strong in the market. As such it would be better to trade in risk free securities than investing in the company stocks and futures. But options still seem a viable choice for trading among investor as visible by the open interest.


77

AN ANALYSIS REPORT ON UNDERLYING ASSET AND DELIVERABLE EQUITY FUTURES AND OPTIONS BY JUHI MITTAL AND GROUP 3 Under the supervision of DR. THOTA NAGARAJU


COURSE- DERIVATIVES AND RISK MANAGEMENT (DRM): ECON F354 Dated: 2ndApril, 2018


78



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80


Name

Juhi Mittal

ID number

2016B3A70298H

Serial number

66


81

TABLE OF CONTENTS SECTION 1: Equity Asset 1.1. Introduction to Equity Asset……………………………………………………………….……….6 1.2. Unadjusted Returns Data…………………………………………………………………………….8 1.3. Adjusted Returns Data………………………………………………………………………………..9 1.4. Economic Interpretation…………………………………………………………………………….11


SECTION 3: Comparisons 3.1 Comparison on Adjusted and Unadjusted Returns………………………………..…….19 3.2 Liquidity Position…………………………………..……………………………….…………………..20



SECTION 6:Conclusion 6Conclusion …………………….......…………………….…………………………………………………...24

SECTION 7: References 6 Conclusion …………………….......…………………….…………………………………………………...24


82 SECTION-1 SECTION-1 1.1 Introduction to Equity Asset

16)

Nature of Business:

Bank of India operates mainly through:   

Treasury operations Wholesale Banking Retail banking

Bank of India Limited provides various banking products and services. It operates through Treasury Operations, Wholesale Banking, and Retail Banking segments. The company accepts various deposit products, such as savings, current, salary, term, and tax saving deposits. It also offers home, property, education, vehicle, personal, pensioner, and holiday loans; housing loans to NRIs/PIOs; overdraft against securities; loans against FCNR deposits; and loans for corporate and MSME customers. In addition, the company provides cash management services; trade finance; project finance and syndication services; online share trading services; insurance products and services; mutual fund products; portfolio management services; credit, debit, and prepaid cards; and remittance, online banking and payment, online income tax return, and ATM and other kiosk services, as well as cards, loans, and services to rural customers. It operates approximately 5,016 branches in India and 29 branches internationally, as well as 32 representative offices 17)

Public/Private Ownership:

The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. In 1921, BoI entered into an agreement with the Bombay Stock Exchange to manage its clearing house. BoI's international expansion began in 1946 when the bank BoI opened a branch in London, the first Indian bank to do so. Mr. Dinabandhu Mohapatra, a post-graduate in Economics and holding a degree in Law, joined Bank of India as a Direct Recruit Officer in the year 1984. During his career spanning over three decades, he has headed various Branches, Departments, Zones and National Banking Groups in Eastern, Western, Northern and Southern parts of the country. Fig1


83

18)

Inception and Circumstances:

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. Started with a vision to become the Bank of choice for Corporates, Medium business and up market customers and development banking for small business, Mass Market and rural market.

19)

Industry and Significance in Industry:

Belongs to Banking industry providing financial services. Bank of India is considered a Money Center Bank whose structure is similar to a common bank; however, its borrowing and lending activities are with governments, large corporations, and regular bank Fig2

20)

Overall greatness of the company:


84





It was first nationalised bank to establish to a fully computerized and ATM facility. The first Indian bank to open its branch outside country in London in 1946. The bank became the first to open branch in Europe – Paris in 1974. The bank is the first PSU Bank in India to implement Two factor Authentication (2FA) – Star Token for both Retail and Corporate internet banking customers as an additional security measure. The first banks to recognize the difficulties faced by MSME in the wake of economic slowdown and proactively set up MSME Care Centres (Help Desks) to provide timely and needy support to MSME units. A Nodal Officer for SME has been identified in each zones to take care of MSME clients. BoI is a founder member of SWIFT(Society for Worldwide Inter Bank Financial Telecommunications), which facilitates provision of cost-effective financial processing and communication services.


TABLE 1(Returns Vs Time)

Fig3

DAILY UNADJUSTED RISK RETURNS(%) VS TIME 40 30 20 10 0 -10 -20

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

   


85 Fig4

WEEKLY RISK UNADJUSTED RETURNS(%) VS TIME 40 30 20 10 0 -10 -20 -30

Fig5

MONTHLY RISK UNADJUSTED RETURN(%) VS TIME 40 20 0 -20 -40

Date

1.3Risk Adjusted Returns Data Table 2


86 Fig6

40.00

DAILY RISK ADJUSTED RETURNS(%) VS TIME

30.00 20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00 Fig7

WEEKLY RISK ADJUSTED RETURN(% )VS TIME 40 30 20 10 0 -10 -20 -30 Fig8

MONTHLY RISK ADJUSTED RETURNS(%) VS TIME 40.000000 30.000000 20.000000 10.000000 0.000000 -10.000000 -20.000000 -30.000000 -40.000000


87 1.4 Economic Interpretation:


The risk adjusted returns are always lesser than the risk unadjusted returns. The risk adjusted return is a more economically practical indicator, as the risk unadjusted returns may give a misleading picture. To be profitable, risk adjusted returns (instead of risk unadjusted returns), should be greater than risk-free returns; since if that is not the case, an investor can make greater profits by investing in risk-free asset.

Time period Daily Weekly Monthly

Sharpe ratio -0.0185 -0.0550 -0.1169

TABLE 3 Fig9

0

Sharpe ratio vs Time for equity Daily

-0.05

-0.1

-0.15

Weekly

Monthly


88 Observations:  The volatility and standard deviation is almost similar in risk unadjusted returns than in risk adjusted returns.  The percentage of mean returns decreases from daily, weekly to monthly in both risk unadjusted and risk adjusted returns.  The volatility is increasing from daily, weekly to monthly in risk unadjusted returns.  The volatility is increasing from daily, weekly to monthly in risk adjusted returns. Action: 

 

Therefore, for a risk-loving investor, it is not a suitable option is to follow a Monthly Investment Schedule, since it involves taking higher risk (due to greater time period), and is instead gives lower (mean) returns than the Daily and Weekly investment alternatives, even though they present lower risk. Its rather better to follow a short term investment schedule and carry on with day trading than invest in longer periods of weekly or monthly periods. But since all returns are negative it would be wiser to invest in T-bills than in equity for the given period.

SECTION-2 2.1 Introduction to Equity Futures Instrument 7) Inception of Futures: The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark Nifty 50 Index. The Exchange introduced trading in Index Options (also based on Nifty 50) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 175 securities stipulated by SEBI. The Bank of India futures trading commenced from November 9th ,2004


89 8) Contract specifications: Given below are the contract specifications for the futures contracts. Since, it is an equity derivative, there is no physical delivery location. However, the lot size is fixed as 6000 shares per lot. Therefore, it is not as lucrative for small, individual traders who wish to trade in smaller lot sizes. However big investment traders can find it easy to trade with the lot size being only 6000 which is still relatively less than other futures stocks of the peer groups.

(TABLE 4) Symbol Instrument Lot Size Price Steps Price Bands Trading Cycle Trading hours Expiry date Daily settlement price Final settlement price

BANKINDIA FUSTK (futures stock) 6000 shares Rs.0.05 Operating range of 10% of the base price 3 months – Near, next far As in equity derivative segment Last Thursday of expiry month Last half hour's weighted average price closing price of underlying equity on the last trading day of the contract

Current details: Fig10

2.2/2.3 Returns Data (Unadjusted and Adjusted)


90

TABLE 5

TABLE 6

TABLE 7

TABLE 8

TABLE 9

TABLE 10

Similar to equity unadjusted return.

Similar to equity adjusted return.

Graphs depicting Adjusted Returns of NEAR Month Futures Contracts Data: Fig11

Daily RISK UNADJUSTED RETURN(%) VS TIME[Futures:Near Month] 40 30 20 10 0 -10 -20

-20

-10.00

-20.00

01-04-2015 01-05-2015 01-06-2015 01-07-2015 01-08-2015 01-09-2015 01-10-2015 01-11-2015 01-12-2015 01-01-2016 01-02-2016 01-03-2016 01-04-2016 01-05-2016 01-06-2016 01-07-2016 01-08-2016 01-09-2016 01-10-2016 01-11-2016 01-12-2016 01-01-2017 01-02-2017 01-03-2017 01-04-2017 01-05-2017 01-06-2017 01-07-2017 01-08-2017 01-09-2017 01-10-2017 01-11-2017 01-12-2017 01-01-2018

-10

Date 07-04-2015 13-04-2015 20-04-2015 24-04-2015 30-04-2015 07-05-2015 13-05-2015 19-05-2015 25-05-2015 29-05-2015 04-06-2015 10-06-2015 16-06-2015 22-06-2015 26-06-2015 02-07-2015 08-07-2015 14-07-2015 20-07-2015 24-07-2015 30-07-2015 05-08-2015 11-08-2015 17-08-2015 21-08-2015 27-08-2015 02-09-2015 08-09-2015 14-09-2015 21-09-2015 28-09-2015 05-10-2015 09-10-2015


91

Daily adjusted Returns(%) Vs Time [Futures: Near Month]

80 60 40 20 0 -20 -40

Weekly adjusted Returns(%) Vs Time [Futures: Near Month]

30

20

10

0

-30

Monthly adjusted Returns(%) Vs Time [Futures: Near Month]

40.00

30.00

20.00

10.00

0.00

-30.00

Fig12-14

Graphs depicting Adjusted Returns of NEXT Month Futures Contracts Data:


92

Daily Adjusted Returns(%) Vs Time [Futures: Next Month] 40 30 20 10 0 -10 -20

Weekly Adj. Returns(%) Vs Time [Futures: Next Month] 30 20 10

-10 -20

DATE 08-05-2015 05-06-2015 03-07-2015 31-07-2015 28-08-2015 09-10-2015 06-11-2015 04-12-2015 08-01-2016 05-02-2016 04-03-2016 08-04-2016 13-05-2016 10-06-2016 08-07-2016 05-08-2016 02-09-2016 30-09-2016 28-10-2016 25-11-2016 23-12-2016 20-01-2017 17-02-2017 24-03-2017 28-04-2017 26-05-2017 23-06-2017 21-07-2017 18-08-2017 22-09-2017 27-10-2017 24-11-2017 22-12-2017

0

-30

Monthly Adj. Returns(%) Vs Time [Futures: Next Month] 1.00 0.80 0.60 0.40 0.20 0.00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Fig15-17

Graphs depicting Adjusted Returns of FAR Month Futures Contracts Data:

-10

-20

-10.0000

-20.0000

1-Apr-2015 1-May-2015 1-Jun-2015 1-Jul-2015 1-Aug-2015 1-Sep-2015 1-Oct-2015 1-Nov-2015 1-Dec-2015 1-Jan-2016 1-Feb-2016 1-Mar-2016 1-Apr-2016 1-May-2016 1-Jun-2016 1-Jul-2016 1-Aug-2016 1-Sep-2016 1-Oct-2016 1-Nov-2016 1-Dec-2016 1-Jan-2017 1-Feb-2017 1-Mar-2017 1-Apr-2017 1-May-2017 1-Jun-2017 1-Jul-2017 1-Aug-2017 1-Sep-2017 1-Oct-2017 1-Nov-2017 1-Dec-2017

-20

31-03-2015 30-04-2015 31-05-2015 30-06-2015 31-07-2015 31-08-2015 30-09-2015 31-10-2015 30-11-2015 31-12-2015 31-01-2016 29-02-2016 31-03-2016 30-04-2016 31-05-2016 30-06-2016 31-07-2016 31-08-2016 30-09-2016 31-10-2016 30-11-2016 31-12-2016 31-01-2017 28-02-2017 31-03-2017 30-04-2017 31-05-2017 30-06-2017 31-07-2017 31-08-2017 30-09-2017 31-10-2017 30-11-2017

-10

Date 8-May-2015 5-Jun-2015 3-Jul-2015 31-Jul-2015 28-Aug-2015 9-Oct-2015 6-Nov-2015 4-Dec-2015 8-Jan-2016 5-Feb-2016 4-Mar-2016 8-Apr-2016 13-May-2016 10-Jun-2016 8-Jul-2016 5-Aug-2016 2-Sep-2016 30-Sep-2016 28-Oct-2016 25-Nov-2016 23-Dec-2016 20-Jan-2017 17-Feb-2017 24-Mar-2017 28-Apr-2017 26-May-2017 23-Jun-2017 21-Jul-2017 18-Aug-2017 22-Sep-2017 27-Oct-2017 24-Nov-2017


93

Daily Adjusted Returns(%) Vs Time [Futures: Far Month]

40

30

20

10

0

Weekly Adjusted Returns(%) Vs Time [Futures: Far Month]

40

30

20

10

0

Monthly Adjusted Returns(%) Vs Time [Futures: Far Month]

40.0000

30.0000

20.0000

10.0000

0.0000

-30.0000

Fig18-20


94 2.3 Economic Interpretation

Observations: 







The percentage of mean returns decrease from daily, weekly to monthly in both risk unadjusted and risk adjusted returns.









Trend in Returns: Near