IMPACT OF RISK-RETURN ANALYSIS ON STOCK FUTURES AND OPTIONS TRADING IN INDIAN EQUITY DERIVATIVES MARKET WITH SPECIAL REFERENCE TO NSE. Ramasamy.V

Ramasamy.V 1 and Dr. G. Prabakaran 2 . 1. Ph.D Research Scholar, Management, Bharathiar University, Coimbatore, Tamilnadu. 2. Assistant Professor, Government Arts College Dharmapuri, Tamilnadu. ...................................................................................................................... Manuscript Info Abstract ......................... ........................................................................ Manuscript History

Futures & options is one of the most important segments in derivatives market in India. Financial derivatives have emerged as one of the largest market of the world during the past two decades in terms of trading volume, number of index and stock options available for trading, participation of investors in derivatives market. It is also observed that investors are showing lot of interest in the derivatives market. However, investors have lost lot of money in the derivatives market due to lack of knowledge about the product and investment strategies etc. The risk involved in futures and options trading can be minimized / return on futures and options trading can be improvised through designing suitable investment strategies. So, investor need to develop risk management as well as risk analysis tool which is the key to limiting futures and options risk/maximizing profit. The derivatives contract is standardized contract. In India, the BSE Sensex and Nifty-50 are the popular indices on futures and options trading. The everyday price changes will occur on stock index futures and options. Some of the major factors such as weather, war, Debt, refugee displacement, land reclamation and micro & macro economic factors will affect the index prices. So, this study challenge to test the precariousness of stock index prices in Indian Derivatives market and also this study have to focus on software industry Infosys & TCS during the period of April to June 2016.

…………………………………………………………………………………………………….... Introduction:-
The futures and options market have been the fastest growing segment of the securities industry. With this rapid growth has come to debate over the purpose served by futures and options in the capital markets. As we see it, the principal function of futures and options is to provide a significant expansion of the patterns of portfolio returns available to investors. Such expansions make investors better off and add to the liquidity and efficiency of the capital markets.
The emergence of the market for derivative products are forward, future and option are traded in the derivatives market. Comparing to stock market, derivatives markets are more risky because everything should be in a contract format. Derivatives are risk management instruments, which derive their value from an underlying asset. Banks, Real-time quotes and information regarding derivative products, trading systems & processes, clearing and settlement, risk management, statistics etc. are available here. Today NSE's share to the total equity market turnover in India averages around 72% whereas; in the futures and options market share is around 99%.

Basics of Equity Derivatives:-
According to the Securities Contract Regulation Act, (1956) the term Derivative is a contract or a product whose value is derived from value of some other asset known as underlying.
Equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives. It provides you with an insight into the daily activities of the equity derivatives market segment on NSE. Two major products under Equity derivatives are Futures and Options, which are available on Indices and Stocks. Futures Contract:-A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contract in the sense that the former are standardized exchange-traded contracts.

491
Options Contract:-An option represents the right to buy or sell a security or other asset during a given time for a specified price. Options are of two types: Call option: It gives the buyer the right but not the obligation to buy a given quantity of the underlying asset.
Put option: It gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset.

European option:
The owner of such option can exercise his right only on the expiry date/day of the contract. In India, Index options are European.

Positions in derivatives market
As a market participant, you will always deal with certain terms like long, short and open positions in the market. Let us understand the meanings of commonly used terms: Long Position Outstanding/ unsettled buy position in a contract is called "Long Position".

Short Position
Outstanding/ unsettled sell position in a contract is called "Short Position".
Open position Outstanding/ unsettled either long (buy) or short (sell) position in various derivative contracts is called "Open Position".

The Derrivatives Market Participants:-
There are broadly three types of participants in the derivatives market -hedgers, traders (also called speculators) and arbitrageurs. An individual may play different roles in different market circumstances.
Hedgers They face risk associated with the prices of underlying assets and use derivatives to reduce their risk. They always wanted to reduce their investment risk.
Speculators They try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts. Derivatives are preferred over underlying asset for speculation purpose, as they offer leverage, are less expensive (cost of transaction is generally lower than that of the underlying) and are faster to execute in size (high volumes market). They are accepting their investment risk with view to more return.
Arbitrageurs Arbitrage is a deal that produces profit by exploiting a price difference in a product in two different markets. Arbitrage originates when a trader purchases an asset cheaply in one location and simultaneously arranges to sell it at a higher price in another location. Such opportunities are unlikely to persist for very long, since arbitrageurs would rush in to these transactions, thus closing the price gap at different locations. They don't want to take risk and always play with safe. Phil Holmes (2006), Stock index future hedging: Hedge ratio estimation, duration effects, expiration effects and Hedge ratio stability this study focused the impact of hedge duration, and the time of expiration and hedge ratio stability over the study period and it helps to find with the help of some statistical tools like OLS, ECM, Risk & Return Analysis, Descriptive Statement and GARCH models. Jensen's Alpha is a risk-adjusted performance benchmark that tells you by how much the returns of an actively managed portfolio of market returns. Originating in the late 1960s, Jensen's Alpha (often abbreviated to Alpha) was developed to evaluate the skill of active fund managers in stock picking.  A positive Alpha means that a portfolio has beaten the market, while a negative value indicates underperformance  A fund manager with a negative alpha and a beta greater than one has added risk to the portfolio but has poorer performance than the market Careful stock picking and financial engineering means that investors can add alpha to a portfolio without adversely affecting beta.

Review Of Literature:-
Jensen Model ALPHA is defined by this equation The market return is usually described by the expected return of an index , like the Nifty 50 Index.
Returns:-Long R t = (P t -P t-1 )/ P t-1 *100 or (Current Stock price -Previous day stock price)/ Previous day stock price*100) Short = (Current Stock price -Next day stock price)/ Next day stock price*100) Where, R t = Return at the time P = The Closing price of the day P t-1 = The Closing price of the day t-1 Descriptive Statement Analysis of daily return, standard deviation, Skewness Kurtosis Jarque-Bera test were analysed.

BETA for Infosys and TCS (April to June).
The positive alpha means the stock has over priced and the negative alpha means the stock has underpriced. Here both stock Infosys & TCS has overpriced.
The beta of less than one means that the security prices will be less volatile than the market price. A beta of greater than 1 indicates that the security's price will be more volatile than the market. Here the beta of stock futures (.65) has less volatile than the market and the beta of stock option (2.20) has more volatile than the market. The above table presents the result of descriptive statistics of standard deviation, Skewness, Kurtosis and Jarque-Bera for Infosys and Tcs during the study period in the month of Apr -Jun 2016. It helps to summarize the overall performance of the business to understand the risk and reward of stock futures and options trading.

Summary of Findings and Suggestions of the Study. Findings;-
The following are the major findings of the Study.  The study found that the highest return was gained from short positions in put options in the both the stocks.  Indian derivatives markets were more unstable throughout the study period. 498 Suggestion:-The following are major suggestions of the study  The investors are advised to create the short positions in the beginning of the monthly contract of the selected Futures and options.  Trading positions should create beginning of the contract to capture the more premium with a view of the eroding in the end of the contract.  Normally, derivatives have certain risk so the investors should not take immediate investment decision and instead they should wait and watch the market movement.  This risk and return analysis helps the investors to take appropriate investment decision.  The Descriptive statement helps the investors invest their securities in the foremost company.  Updating of market information help the investors to get maximum return.  The investors should aware about the stock market conditions (e.g. Macro and micro data's monetary policy, GDP, inflation, war, social and political issues, currency fluctuation, etc.)  The study suggests that the Regulatory Authority (SEBI) must monitor the reliability or the truth of information released by Companies.  The present study suggests that whenever the performances of sectors declines in response to crisis announcement, the share holders should obtain instant decision either to buy or sell the stocks.  Investors should enter in to the market with right direction with view to gain potential return.

Conclusion:-
Investors need to see the overall on an average the value of beta and the value of expected returns. There are several different types of risks involved in financial derivatives transactions. Achieving the right balance between risk and return will ensure that traders achieve their financial goals with proper decisions. Risk in futures and options investment is about what might cause a loss of money on those investments. Deciding what risk is to take high or low as well as looking at chronological data are two examples of understanding risks and returns of future financial planning. The recent financial derivatives growth will definitely lead to boost the investors' self-belief in the Indian derivative market and carry an overall progress in all the segments of this market. Futures and Options traders need a very firm knowledge of the basics of Futures and options trading before even thinking of ways to make the money out of it. So, this article would give a broad outlook for the new investors to learn about the Futures and options trading in India.