Page 181 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes
Did u know? The exercise settlement value is the difference between the strike price and
the final settlement price of the relevant option contract.
For call options, the exercise settlement value receivable by a buyer is the difference between
the final settlement price and the strike price for each unit of the underlying conveyed by the
option contract, while for put options it is difference between the strike price and the final
settlement price for each unit of the underlying conveyed by the option contract. Settlement of
exercises of options on securities is currently by payment in cash and not by delivery of securities.
It takes place for in-the-money option contracts.
The exercise settlement value for each unit of the exercised contract is computed as follows:
Call options = Closing price of the security on the day of exercise - Strike price
Put options = Strike price - Closing price of the security on the day of exercise

For final exercise the closing price of the underlying security is taken on the expiration day. The
rd
exercise settlement by NSCCL would ordinarily take place on 3 day following the day of
exercise. Members may ask for clients who have been assigned to pay the exercise settlement
value earlier.
Special Facility for Settlement of Institutional Deals: NSCCL provides a special facility to
Institutions/foreign Institutional Investors (FIIs)/Mutual Funds etc. to execute trades through
any TM, which may be cleared and settled by their own CM. Such entities are called custodial
participants (CPs). To avail of this facility, a CP is required to register with NSCCL through his
CM. A unique CP code is allotted to the CP by NSCCL. All trades executed by a CP through any
TM are required to have the CP code in the relevant field on the trading system at the time of
order entry. Such trades executed on behalf of a CP are confirmed by their own CM (and not the
CM of the TM through whom the order is entered), within the time specified by NSE on the trade
day though the on-line confirmation facility.

Till such time the trade is confirmed by CM of concerned CP, the same is considered as a trade
of the TM and the responsibility of settlement of such trade vests with CM of the TM. Once
confirmed by CM of concerned CP, such CM is responsible for clearing and settlement of deals
of such custodial clients. FIIs have been permitted to trade in all the exchange traded derivative
contracts subject to compliance of the position limits prescribed for them and their sub-accounts,
and compliance with the prescribed procedure for settlement and reporting. A Fl/a sub-account
of the FII, as the case may be, intending to trade in the F&O segment of the exchange, is required
to obtain a unique Custodial Participant (CP) code allotted from the NSCCL. FII/sub-accounts
of FIIs which have been allotted a unique CP code by NSCCL are only permitted to trade on the
F&O segment. The FII /sub-account of Fl ensures that all orders placed by them on the Exchange
carry the relevant CP code allotted by NSCCL.

Self Assessment

Choose the correct answer from the following options:
6. Exercise settlement for option contracts takes place at:
(a) Settlement price of the futures contract

(b) Closing price of the underlying asset
(c) Closing price of the far month contract
(d) Closing price of the options contract

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