INDIAN BUSINESS ENVIRONMENT

MODULE 6
MONEY
Monitory Aggregates
Money Market

Capital Market

FDI in Economic Development

SEBI – Functions and Achievements

Stock Exchange

Depository System in India

An Overview of Money
 Money
 is anything that is generally accepted as a medium
of exchange.
 The sets of assets in an economy that people
regularly use to buy goods and services from other
people.
• Money is not income, and money is not wealth. Money is:
• a means of payment / medium of exchange
• a store of value
• a unit of account
What is Money?

 Barter is the direct exchange of goods

and services for other goods and
services.
 A barter system requires a double
coincidence of wants for trade to take
place. Money eliminates this problem.
 As a medium of exchange, or means of
payment, money is generally accepted by
buyers and sellers as payment for goods
and services.
What is Money?

 As a store of value, money serves as an

asset that can be used to transport
purchasing power from one time period
to another.
What is Money?

 As a unit of account, money is a

standard that provides a consistent way
of quoting prices.
What is Money?

 Money is easily portable,

and easily exchanged for
goods at all times.
 The liquidity property of
money makes money a good
medium of exchange as well
as a store of value.
 Definition of Money Supply
(M1, M2 and M3)
·  Definition of Money Supply:
the quantity of money available in the
economy

    Definition
of Monetary Policy:
the setting of the money supply by
policymakers in the central bank
 Definition of Money Supply
(M1, M2 and M3)
M1 – the narrowest definition of money supply, consists of
currency outside banks plus checking accounts plus
traveller's checks
 Currency held outside banks – includes coins and paper

money in the hands of public

 Checking accounts – balances can be withdrawn by using

check
 Traveller's check – issued in specific denominations, these

are treated as cash

 M1 = currency held outside banks + checking accounts +

traveller's check
 Definition of Money Supply
(M1, M2 and M3)
M2 – A broader definition of money supply, it
includes all of the components of M1 plus time
deposits and savings deposits
Time deposits (fixed deposits) – interest-earning
deposits with a specified maturity, which are
subject to penalty for early withdrawal
*   Savings deposits – interest-earning deposits
with no specific maturity
*         M2 = M1 + time deposits + saving deposits
 Definition of Money Supply
(M1, M2 and M3)

M3 = M2 + deposits with non-bank financial

institution (e.g., deposits of finance
companies and post office saving)
Monetary Aggregates
 The RBI defines the monetary aggregates as

 Reserve Money (M0):

 Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI =
Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on
banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net
non-monetary liabilities.

 M1: Currency with the public + Deposit money of the public (Demand deposits with the
banking system + ‘Other’ deposits with the RBI).
 Monetary Aggregates

 M2:
 M1 + Savings deposits with Post office savings banks.
 M3:
 M2+ Time deposits with the banking system = Net bank
credit to the Government + Bank credit to the commercial
sector + Net foreign exchange assets of the banking sector
+ Government’s currency liabilities to the public – Net
non-monetary liabilities of the banking sector (Other than
Time Deposits).
 M4:
 M3 + All deposits with post office savings banks
(excluding National Savings Certificates).
MONEY
MARKET
CONTENTS

 What is Money Market?

 Features of Money Market?
 Objective of Money Market?
 Importance of Money Market?
 Composition of Money Market?
 Instrument of Money Market?
 Structure of Indian Money Market?
 Disadvantage of Money Market?
 What is Money Market?

As per RBI definitions “ A market for short terms

financial assets that are close substitute for money,
facilitates the exchange of money in primary and
secondary market”.

 The money market is a mechanism that deals with

the lending and borrowing of short term funds
(less than one year).

 A segment of the financial market in which

financial instruments with high liquidity and very
short maturities are traded.
 Continued…….

 It doesn’t actually deal in cash or money but

deals with substitute of cash like trade bills,
promissory notes & govt papers which can
converted into cash without any loss at low
transaction cost.

 It includes all individual, institution and

intermediaries.
Contd…
 Money market refers to a mechanism whereby on
the one hand borrowers manage to obtain short-
term loanable funds and on the other , lenders
succeed in getting creditworthy borrowers for their
money.
 In any money market, commercial banks are the
most important lenders
Features of Money Market

 It is a market purely for short-terms funds or

financial assets called near money.

 It deals with financial assets having a maturity

period less than one year only.

 In Money Market transaction can not take place

formal like stock exchange, only through oral
communication, relevant document and written
communication transaction can be done.
 Continued……..

 Transaction have to be conducted without the help

of brokers.

 It is not a single homogeneous market, it

comprises of several submarket like call money
market, acceptance & bill market.

 The component of Money Market are the

commercial banks, acceptance houses & NBFC
(Non-banking financial companies).
Objective of Money Market

 To provide a parking place to employ short term

surplus funds.

 To provide room for overcoming short term

deficits.

 To enable the central bank to influence and

regulate liquidity in the economy through its
intervention in this market.

 To provide a reasonable access to users of short-

term funds to meet their requirement quickly,
adequately at reasonable cost.
 Importance of Money Market

 Development of trade & industry.

 Development of capital market.

 Smooth functioning of commercial banks.

 Effective central bank control.

 Formulation of suitable monetary policy.

Structure of Indian Money Market
I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (discount and finance house of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
Continued…..

II. UNORGANISED SECTOR

1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis

III. CO-OPERATIVE SECTOR

1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks
The Indian Money Market
 The Indian money market is not an integrated unit.
It is broadly divided into two parts, viz,

 Organised- fairly integrated. Both nationalised and

the private sector commercial banks constitute the
core of the organised money market sector
 Unorganised- the unorganised sector comprises the
indigenous bankers and money lenders
The Indian Money Market
Unorganised sector of the Indian Money Market

 Lending activities are mostly confined to small

towns and villages where modern banking facilities
are still inadequate.
 Farmers, artisans and other small scale producers
and traders who do not have access to modern
banks, borrow from them
Unorganised sector of the Indian Money Market contd…

1. Unregulated non-bank financial intermediaries:

 Finance companies

 Chit funds

 Nidhis

2. Indigenous bankers: Gujarati Shroffs, Chettiars,

Marwari Kayas, Multani Shroffs
3. Money lenders: pathans, Kabulis
 Composition of Organised Money
Market

Money Market consists of a number of sub-markets

which collectively constitute the money market.
They are,
 Call Money Market

 Commercial bills market or discount market

 The Repo markets

 Treasury bill market

 Money market mutual funds

 Instrument of Money Market

A variety of instrument are available in a developed

money market. In India till 1986, only a few
instrument were available.

They were
 Treasury bills

 Money at call and short notice in the call loan

market.
 Commercial bills, promissory notes in the bill

market.
Call Money Markets
 The call money market consists of overnight and
money at short notice for periods upto 14 days.
 It is meant to balance the short term needs of
banks.
Treasury Bills (T-Bills)
 (T-bills) are the most marketable money market
security.
 They are issued with three-month, six-month
and one-year maturities.
 T-bills are purchased for a price that is less than
their par(face) value; when they mature, the
government pays the holder the full par value.
 T-Bills are so popular among money market
instruments because of affordability to the
individual investors.
Certificate of deposit (CD)

 A CD is a time deposit with a bank.

 Like most time deposit, funds can not withdrawn
before maturity without paying a penalty.
 CD’s have specific maturity date, interest rate
and it can be issued in any denomination.
 The main advantage of CD is their safety.
 Anyone can earn more than a saving account
interest.
Commercial paper (CP)
 CP is a short term unsecured loan issued by a
corporation typically financing day to day
operation.

 CP is very safe investment because the financial

situation of a company can easily be predicted
over a few months.

 Only company with high credit rating issues CP’s.

Repurchase agreement (Repos)

 Repo is a form of overnight borrowing and is used

by those who deal in government securities.
 They are usually very short term repurchases
agreement, from overnight to 30 days of more.
 The short term maturity and government backing
usually mean that Repos provide lenders with
extremely low risk.
 Repos are safe collateral for loans.
Banker's Acceptance
 A banker’s acceptance (BA) is a short-term credit
investment created by a non-financial firm.
 BA’s are guaranteed by a bank to make payment.
 Acceptances are traded at discounts from face
value in the secondary market.
 BA acts as a negotiable time draft for financing
imports, exports or other transactions in goods.
 This is especially useful when the credit
worthiness of a foreign trade partner is unknown.
Money market mutual funds
 Was introduced in 1992 by RBI
 A money market fund is a mutual fund that invests solely in
money market instruments. Money market instruments are forms
of debt that mature in less than one year and are very liquid.
 Treasury bills make up the bulk of the money market
instruments. Securities in the money market are relatively risk-
free.

Money market funds are generally the safest and most secure of
mutual fund investments. The goal of a money-market fund is to
preserve principal while yielding a modest return.
 Disadvantage of Money Market

 Purchasing power of your money goes down, in

case of up in inflation.
 Absence of integration.
 Absence of Bill market.
 No contact with foreign Money markets.
 Limited instruments.
 Limited secondary market.
 Limited participants.
Characteristics of Indian Money Market

 Lack of integration
 Lack of rational interest rates structure

 Shortage of funds in the money markets

 Seasonal stringency of funds

 Inadequate banking facilities

CAPITAL MARKETS
Why Capital Markets Exist

 Capital markets facilitate the transfer of

capital (i.e. financial) assets from one owner to
another.
 They provide liquidity.
 Liquidity refers to how easily an asset can

be transferred without loss of value.

 A side benefit of capital markets is that the
transaction price provides a measure of the
value of the asset.
Financial markets
 The term collectively refers to all those
organisations which lend funds to business
enterprises.
 It is composed of two constituents- money market
and the capital market
 Money market- deals with provision of short term
funds
 Capital market- deals with grant of medium term
and long term credit
Interdependencies in both markets
 Reasons for interdependencies
 Most of the suppliers prefer to operate in both
markets
 Users of funds also have an option to obtain funds
from either market
 Funds flow freely in the market
 Rate of interests are interdependent
 Some institutions serve both money and capital
markets
Role of Capital Markets

 Mobilization of Savings & acceleration of

Capital Formation
 Promotion of Industrial Growth
 Raising of long term Capital
 Ready & Continuous Markets
 Proper Channelisation of Funds
 Provision of a variety of Services
Structure of capital market
 Financial institutions- IFCI, IDBI, LIC, ICICI,
SFC, Exim banks

 Securities markets- 1. gilt edged market- market for

government securities
 2. corporate securities market- market where
securities issued by firms can be bought and sold
freely
Indian Capital Market - Historical
perspective

 Stock Market was for a privileged few

 Archaic systems - Out cry method
 Lack of Transparency
 No use of Technology
 Outdated banking system
 Volumes - less than Rs. 300 cr per day
 No settlement guarantee mechanism - High
risks
 Indian Capital Market

Market Instruments Intermediaries Regulator

SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
New Issues stocks •Underwriters

Equity Hybrid Debt

Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII

 Capital Markets - Reforms

 Each scam has brought in reforms - 1992 /

2001
 Screen based Trading through NSE
 Capital adequacy norms stipulated
 Dematerialization of Shares - risks of
fraudulent paper eliminated
 Entry of Foreign Investors
 Investor awareness programs
 Inter-action between banking and exchanges
 Capital Market Instruments

Equity Hybrid Debt

Deep
Equity Preference ADR / GDR Debentures Zero coupon
Shares bonds Discount
Shares
Bonds
FDI-Introduction
 Foreign direct investment is an investment made by
a foreign individual or company in productive
capacity of another country. It is the movement of
capital across national frontiers in a way that grants
the investor control over the acquired asset.
 Background

 As the third-largest economy in the world, India is

a preferred destination for foreign direct
investments (FDI);
 India has strengths in information technology and
other important areas such as auto components,
apparels, chemicals, pharmaceuticals, jewelry and
so on.
 Although India has always held promise for
global investors, its rigid FDI policies were a
significant hindrance in this context.
Background
 However, as a result of a series of ambitious and
positive economic reforms aimed at deregulating the
economy and stimulating foreign investment, India
has positioned(projected) itself as one of the front-
runners in  Asia Pacific Region.
 India has a large pool of skilled managerial and
technical expertise. The size of the middle-class
population at 300 million exceeds the population of
both the US and the EU, and represents a powerful
consumer market.
Current Status
 India's recently liberalized FDI policy permits up to a
100% FDI stake in ventures.
 Industrial policy reforms have substantially reduced
industrial licensing requirements, removed
restrictions on expansion and facilitated easy access
to foreign technology and FDI.
 The upward moving growth curve of the real-estate
sector owes some credit to a booming economy and
liberalized FDI regime.
Current Status
 A number of changes were approved on the FDI
policy to remove the cap in most of the sectors.
Restrictions will be relaxed in sectors as diverse as
civil aviation, construction development, industrial
parks, commodity exchanges, petroleum and natural
gas, credit-information services, Mining and so on.

 But this still leaves an unfinished agenda of

permitting greater foreign investment in politically
sensitive areas like insurance and retailing.
Government Stand
 Government of India accepts the key role of
Foreign Direct Investment (FDI) in economic
development not only as an addition to domestic
capital but also as an important source of
technology and global best practices. The
Government of India has put in place a liberal
and Transparent FDI policy.
 FDI up to 100% is allowed under the automatic
route in most sectors/activities.
Government Stand
 FDI policy in India is reckoned to be among the
most liberal in emerging economies. FDI Policy
permits FDI up to 100 % from foreign/NRI
investor without prior approval in most of the
sectors including the services sector under
automatic route.
 FDI Prohibited

 FDI is not permissible in Gambling and Betting, or

Lottery Business, Business of chit fund, Nidhi
Company, Housing and Real Estate business,
Trading in Transferable Development Rights
(TDRs), Retail Trading, Atomic Energy
Agricultural or plantation activities or Agriculture
(excluding Floriculture, Horticulture,
Development of Seeds, Animal Husbandry,
Cultivation of Vegetables, Mushrooms etc. under
controlled conditions and services related to agro
and allied sectors) and Plantations(other than Tea
plantations)
 Financial Regulators

 Securities and Exchange Board of India (SEBI)

 Reserve Bank of India

 Ministry of Finance
 SEBI
 It was constituted and made a statutory body by
SEBI act 1992.
 With the coming into effect of SEBI, some of the
powers and function exercised by the central
government, in respect of regulation of stock
exchanges were transferred to the SEBI.
 OBJECTIVES OF SEBI

[Link] and regulating the working of stock brokers,

sub-brokers, share transfer agents,
underwriters……….who may be associated securities
market in any manner.

[Link] and regulating the working of collective

investment scheme including mutual funds.

[Link] insider trading in securities.

[Link] substantial acquisition of shares and takeovers

 Functions Of SEBI

 It enhances investor's knowledge on market by

providing education.

 It regulates the stockbrokers and sub-brokers.

 To promote Research and Investigation

The Recent Initiatives Undertaken

 Sole Control on Brokers

 For Underwriters

 For Share Prices

 For Mutual Funds

 WHAT IS STOCK EXCHANGE

Stock exchange is that place where trading of shares is done in

terms of sale and purchase.
The role of the stock exchange
 Raising capital for businesses

 Mobilizing savings for investment

 Facilitate company growth

 Redistribution of wealth
The role of the stock exchange
 Corporate governance

 Creates investment opportunities for small investors

 Government raises capital for development projects

 Barometer of the economy

 Growth Pattern of the Indian Stock Market
Sl.N As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
o. December
1 No. of 7 7 8 8 9 14 20 22
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
4
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 11027 47812
5 Capital of Listed 9 1
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
6 Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
7 Capital per Listed
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358 170 148 126 170 260 344 803
8 of Capital per
INTRODUCTION :
 There are 23 stock exchanges in the
India. Mumbai's (earlier known as
Bombay), Bombay Stock Exchange is the
largest, with over 6,000 stocks listed. The
BSE accounts for over two thirds of the
total trading volume in the country.
Established in 1875, the exchange is also
the oldest in Asia. Among the twenty-two
Stock Exchanges recognised by the
Government of India under the Securities
Contracts (Regulation) Act, 1956, it was
the first one to be recognised and it is the
only one that had the privilege of getting
permanent recognition ab-initio.
 Cont…….
Bombay stock exchange : it has 30 companies sripted.
Name:[Link]
[Link]
[Link]
[Link]
[Link]
[Link]
[Link]
[Link] AMBUJA
[Link]
[Link] BANK
 CONT……
[Link] HONDA
[Link]
[Link]
[Link] BANK
[Link]
[Link]
17.L&T
[Link]
[Link]
[Link]
 CONT……
[Link]
[Link] COMMUNICATION
[Link] ENERGY
[Link]
[Link]
[Link]
[Link]
[Link] MOTERS
[Link] STEEL
[Link]
BSE CHART

NSE
 The National Stock Exchange (NSE),
located in Bombay, is India's first debt
market. It was set up in 1993 to
encourage stock exchange reform
through system modernization and
competition.
 It opened for trading in mid-1994. It
was recently accorded recognition as a
stock exchange by the Department of
Company Affairs.
 CONT……….
 The Organisation: The National Stock
Exchange of India Limited has genesis
in the report of the High Powered
Study Group on Establishment of New
Stock Exchanges, which
recommended promotion of a National
Stock Exchange by financial
institutions (FIs) to provide access to
investors from all across the country
on an equal footing.
 CONT………

 Based on the recommendations, NSE was promoted by leading

Financial Institutions at the behest of the Government of India and was
incorporated in November 1992 as a tax-paying company unlike other
stock exchanges in the country
 Cont……………………..ss

 NSE Group:
1. India Index Services & Products Ltd. (IISL)
2. National Securities Clearing Corporation Ltd.
(NSCCL)
3. [Link] Ltd.
4. National Securities Depository Ltd. (NSDL)
5. DotEx International Limited
Depository System in India
 What is a depository?
 A "Depository" is a facility for holding securities, which enables
securities transactions to be processed by book entry.
 To achieve this purpose, the depository may immobilize the
securities or dematerialise them (so that they exist only as
electronic records).India has chosen the dematerialisation route.
In India, a depository is an organisation, which holds the
beneficial owner's securities in electronic form, through a
registered Depository Participant (DP).
 A depository functions somewhat similar to a commercial bank.
To avail of the services offered by a depository, the investor has
to open an account with a registered DP
 What is dematerialisation?
 "Dematerialisation" is a process by which physical certificates are
converted into electronic form.
 Who is a Beneficial Owner (BO)?
 "Beneficial Owner" is a person in whose name a demat account is
opened with CDSL for the purpose of holding securities in the electronic
form and whose name is recorded as such with CDSL.
 Who is a Depository Participant?
 A "Depository Participant" (DP) is an agent of the depository who is
authorised to offer depository services to investors. Financial
institutions, banks, custodians and stockbrokers complying with the
requirements prescribed by SEBI/ Depositories can be registered as DP.
What is an ISIN (International Securities Identification Number)?
"ISIN" is the unique identification number given to a security of an issuer at the time of admitting
such security in the depository system.

Whether different securities issued by the same Issuer will have same ISIN?
No, different securities issued by the same issuer will have different ISINs.

What services are provided by a DP?

Following services can be availed of through a DP :
a) Dematerialisation, i.e. getting physical securities converted into electronic form.
b) Rematerialisation, i.e. getting electronic securities balances held in a BO account converted
into physical form.
c) To maintain record of holdings in the electronic form.
d) Settlement of trades by delivering / receiving underlying securities from / in BO accounts.
e) Settlement of off-market trades i.e. transactions between BOs entered outside the Stock
Exchange.
f) Providing electronic credit in respect of securities allotted by issuers under IPO or otherwise.
g) Receiving on behalf of demat account holders non-cash corporate benefits, such as, allotment
of bonus and rights shares in electronic form or securities resulting upon consolidation, stock
split or merger / amalgamation of companies.
Depository System in India
What is a “spot” transaction?
In a spot market, transactions are settled “on the
spot”. Once a trade is agreed upon, the settlement –
i.e. the actual exchange of money for goods – takes
place with the minimum possible delay. When a
person selects a shirt in a shop and agrees on a price,
the settlement
(exchange of funds for goods) takes place immediately.
That is a spot market.
 In a forward contract

Two parties irrevocably agree to settle a trade at a future

date,for a stated price and quantity. No money changes
hands at the time the trade is agreed upon.

Suppose a buyer L and a seller S agree to do a trade in 100 grams of gold on 31 Dec 2001
at Rs.5,000/tola. Here, Rs.5,000/tola is the “forward price of 31 Dec 2001 Gold”.
The buyer L is said to be long and the seller S is said to be short.
Once the contract has been entered into, L is obligated to pay S Rs. 500,000 on 31
Dec 2001, and take delivery of 100 tolas of gold. Similarly, S is obligated to be ready to
accept Rs.500,000 on 31 Dec 2001, and give 100 tolas of gold in exchange.
 What are “derivatives”?

A derivative is a financial instrument which derives

its value from some other financial price. This
“other financial price” is called the underlying.

A wheat farmer may wish to contract to sell his harvest at a future date to
eliminate the risk of a change in prices by that date. The price for such a
contract would obviously depend upon the current spot price of wheat. Such a
transaction could take place on a wheat forward market. Here, the wheat
forward is the “derivative” and wheat on the spot market is “the underlying”.
The terms “derivative contract”, “derivative product”, or “derivative” are used
interchangeably.
The most important derivatives are futures and options.
 Continued

 Derivative securities are available on stocks,

stock indices, bullion, index, currency, bonds,
interest rates, commodities.
 Very important financial instruments for risk
management as they allow risks to be separated
and traded and act as a form of insurance. Risks
in trading derivatives may change depending on
what happens to the underlying asset
 Why is forward contracting useful -Futures
Forward contracting is valuable in hedging and speculation.
A futures contract is a forward contract which trades on an
exchange.
The classic hedging application is that of a wheat farmer forward-selling his
harvest, at the time of sowing, in order to eliminate price risk. Conversely, a bread
factory could buy wheat forward in order to assist production planning without the
risk of price fluctuations.
If a speculator has information or analysis which forecasts an upturn in a price, then she
can adopt a buy position (go long) on the forward market instead of the cash market.
The speculator would wait for the price to rise, and then close out the position on the
forward market (by selling off the forward contracts).
This is a good alternative to speculation using the spot market, which involves buying
wheat, storing it for a while, and then selling it off. A speculator prefers transactions
involving a forward market because
(a) the costs of taking or making delivery of wheat is avoided, and
(b) funds are not blocked for the purpose of speculation.
What is an “option”?

An option is the right, but not the obligation, to buy

or sell something at a stated date at a stated price. A
“call option” gives one the right to buy, a “put
option” gives one the right to sell.

Consider a typical transaction. On 1 July 2000, S sells a call option to L for a price
Of Rs.3.25. Now L has the right to come to S on 31 Dec 2000 and buy 1 share of
Reliance at Rs.500. Here, Rs.3.25 is the “option price”, Rs.500 is the “exercise
price” and 31 Dec2000 is the “expiration date”. L does not have to buy 1 share of Reliance on
31 Dec 2000 at Rs.500 from S (unlike a forward/futures contract which is binding on both
sides). It is only if Reliance is above Rs.500, on 31 Dec 2000, that L will find it useful to
exercise his right. If L chooses to exercise the option, S is obliged to live up to his end of the
deal: i.e. S stands ready to sell a share of Reliance to L at Rs.500 on 31 Dec 2000.
Cont..
Hence, at option expiration, there are two outcomes that are
possible: an option could be profitably exercised, or it could
be allowed to die unused. If the option lapses unused,
then L has lost the original option price (Rs.3.25) and S has
gained it.
When L and S enter into a futures contract, there is no
payment (other than initial margin). In contrast, the option has
a positive price which is paid in full on the date that the option is
purchased.