weekly market repot

The market did not show much activity earlier in the week and traded within a tight band. Though the Continuous flushing of funds by the FIIs doubled with the good expiry helped the Indian markets to trade a bit in an active mode and swing by over 345 points or 2% in a week. This is the second consecutive week that markets have shown reasonable movement. At the end of the week, the Sensex and the Nifty managed to hold on the important levels? 17,600 for Sensex and 5250 for Nifty. Sensex surged marginally by 66 points (+0.38%), while the Nifty Rose by 19 points (+0.36%).

The Passage of U.S. Heathcare Reform Bill brought the right pill for the Indian Healthcare stocks, which jumped by 2.59%, the most among the BSE? sector indices. The Fast Moving Consumer Goods (FMCG) SCRIP followed suit and closed 1.19% higher. RBI? S surprise rate hike acted as a dampener for interest rate-sensitive Realty counter that declined the most for the week? By 4.05%? Followed by Teck stocks that fell by 3.26%. The remaining sector indices ended with listless gain or loss of data. Out of 13 BSE sector indices, Six ended in negative and positive in seven.

OPTIONS !

Although options can be written on any underlying,let's use options on common stock as an example. A call (put) option on a stock gives its holder the right to buy (sell) a fixed number of shares at a given price at some future date.The specified price is called the exercise price.Whoever sells an option at inception of the contract is called the option writer. When the holder of an option takes advantage of her right,She is said to "exercise it" An option holder who cannot gain from exercising an option before expiration dose not exercise it.The purchase price of an option is called the option premium.

Options enable their holders to lever their resources while at the same time limiting their risk.Suppose an investor, Smith,believes that the current price of $50for Upside Inc.common stock is too low. Let's assume that the premium on a call option that gives the right to buy 100 shares at $ 50 per share is $ 10 per share. By investing $ 1000 smith van buy call options to purchase 100 shares. If she does so, she will gain from stock price increases as if she had invested in 100 shares,even though he invests only an amount equal to the value of 20 shares.With only # 1000 to invest,smith could borrow $4000 to buy 100 shares.At maturity,she would then have to repay the loan.The gain made upon exercising the option is therefore similar to the gain from a levered position in the stock-a position consisting of purchasing shares with one's own money and some borrowed money.However,if Smith borrows, she could lose up to $5000 plus interest due on the loan if the stock price falls to zero. With the call option, she can lose at most $ 1000, which she does if the stock price does not rise above $ 50.

Forward Contracts

A forward contract obligates one party to buy the underlying at a fixed price at a certain time in the future,called maturity from a counerparty who is obligated to sell the underlying at that fixed price.Consider a U.S. exporter who expects to receive $100 million in six months. Suppose that the price of the euro is $1.20 now.If the price of the euro falls by 10 percent over the next six months,the exporter loses$12 million.By selling euros forward, the exporter locks in the current forward rate (if the forward rate is $ 1.18, the exporter receives $118 million at maturity).Financial hedging involves taking a financial position to reduce one's exposure or sensitivity to risk,hedging is perfectwhen all exposure to the risk is eliminated through the financial position.In our example,the financial position is a forward contract,the risk is the euro,the exposure is $100 million in six months,and the exposure to the euro is perfectly hedged with the forward contract.Since no money changes hands when the exporter buys euros forward,the market value of the forward contract must be Zero when initiated since otherwise the exporter would get something for nothing

What Are Derivatives !

Derivatives come in different flavors:plain vanilla and exotic.plain vanilla includes contracts to buy or sell for future delivery.called forward and futures contracts.contracts that involve an option to buy or sell at a fixed price sometime in the future,called options, and combinations of forwad,futures,and option contracts.Exotic derivatives are everything else in the derivatives world.

NIFTY WATCH

Nifty opened positive but remained highly range bound for the entire session to end the day with a marginal gain of 3 points at 5137. The market breadth was in the favour of bears at almost 1:2. The BSE Metal and Oil & Gas indices outperformed the broader mark of whereas BSE Realty and CG indices lost the most.

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