RISK DISCLOSURE DOCUMENTorders either on the buy side or the sell side, or iftrading is halted in a security due to any action onaccount of unusual trading activity or stock hittingcircuit filters or for any other reason.1.8 System/Network Congestion: Trading onNSE/BSE is in electronic mode, based onsatellite/leased line based communications,combination of technologies and computer systems toplace and route orders. Thus, there exists a possibilityof communication failure or system problems or slowor delayed response from system or trading halt, or anysuch other problem/glitch whereby not being able toestablish access to the trading system/network, whichmay be beyond the control of and may result in delay inprocessing or not processing buy or sell orders eitherin part or in full. You are cautioned to note that althoughthese problems may be temporary in nature, but whenyou have outstanding open positions or unexecutedorders, these represent a risk because of yourobligations to settle all executed transactions.2. As far as futures and options segment isconcerned, please note and get yourselfacquainted with the following additional features:2.1 Effect of "leverage" or "gearing" : The amount ofmargin is small relative to the value of the derivativescontract so the transactions are 'leveraged' or 'geared'.Derivatives trading, which is conducted with a relativelysmall amount of margin, provides the possibility ofgreat profit or loss in comparison with the principalinvestment amount. But transactions in derivativescarry a high degree of risk.You should therefore completely understand thefollowing statements before actually trading inderivatives trading and also trade with caution whiletaking into account one's circumstances, financialresources, etc. If the prices move against you, you maylose a part of or whole margin equivalent to theprincipal investment amount in a relatively short periodof time. Moreover, the loss may exceed the originalmargin amount.a) Futures trading involves daily settlement of allpositions. Every day the open positions are marked tomarket based on the closing level of the index. If theindex has moved against you, you will be required todeposit the amount of loss (notional) resulting fromsuch movement. This margin will have to be paid withina stipulated time frame, generally beforecommencement of trading the next day.b) If you fail to deposit the additional margin by thedeadline or if an outstanding debt occurs in youraccount, the broker/member may liquidate a part of orthe whole position or substitute securities. In this case,you will be liable for any losses incurred due to suchclose-outs.c) Under certain market conditions, an investor mayfind it difficult or impossible to execute transactions. Forexample, this situation can occur due to factors such asilliquidity i.e. when there are insufficient bids or offers orsuspension of trading due to price limit or circuitbreakers etc.d) In order to maintain market stability, the followingsteps may be adopted: changes in the margin rate,increase in the cash margin rate or others. These newmeasures may also be applied to the existing openinterests. In such conditions, you will be required to putup additional margins or reduce your positions.e) You must ask your broker to provide the full details ofthe derivatives contracts you plan to trade i.e. thecontract specifications and the associated obligations.2.2 Currency specific risksa) The profit or loss in transactions in foreign currencydenominatedcontracts, whether they are traded in yourown or another jurisdiction, will be affected byfluctuations in currency rates, where there is a need toconvert from the currency denomination of the contractto another currency.b) Under certain market conditions, you may find itdifficult or impossible to liquidate a position. This canoccur, for example when a currency is deregulated orfixed trading bands are widened.c) Currency prices are highly volatile. Pricemovements for currencies are influenced by, amongother things changing: supply-demand relationships,trade, fiscal, monetary, exchange control programs andpolicies of governments, foreign political and economicevents and policies; changes in national andinternational interest rates and inflation; currency25
RISK DISCLOSURE DOCUMENTdevaluation; and sentiment of the market place. Noneof these factors can be controlled by any individualadvisor and no assurance can be given that anadvisor's advice will result in profitable trades for aparticipating customer or that a customer will not incurlosses from such events.2.3 Risk of option holders:a) An option holder runs the risk of losing the entireamount paid for the option in a relatively short period oftime. This risk reflects the nature of an option as awasting asset, which becomes worthless when itexpires. An option holder, who neither sells his option inthe secondary market nor exercises it prior to itsexpiration, will necessarily lose his entire investment inthe option. If the price of the underlying does notchange in the anticipated direction before the optionexpires to an extent sufficient to cover the cost of theoption, the investor may lose all or a significant part ofhis investment in the option.b) The Exchange may impose exercise restrictionsand have absolute authority to restrict the exercise ofoptions at certain times in specified circumstances.2.4 Risks of option writers:a) If the price movement of the underlying is not in theanticipated direction, the option writer runs the risks oflosing substantial amount.b) The risk of being an option writer may be reducedby the purchase of other options on the sameunderlying interest and thereby assuming a spreadposition or by acquiring other types of hedgingpositions in the options markets or other markets.However, even where the writer has assumed a spreador other hedging position, the risks may still besignificant. A spread position is not necessarily lessrisky than a simple 'long' or 'short' position.c) Transactions that involve buying and writing multipleoptions in combination, or buying or writing options incombination with buying or selling short the underlyinginterests, present additional risks to investors.Combination transactions, such as option spreads, aremore complex than buying or writing a single option.And it should be further noted that, as in any area ofinvesting, a complexity not well understood is, in itself, arisk factor. While this is not to suggest that combinationstrategies should not be considered, it is advisable, asis the case with all investments in options, to consultsomeone, who is experienced and knowledgeable withrespect to the risks and potential rewards ofcombination transactions under various marketcircumstances.3. General:3.1 The term 'econstituent' shall mean and include aclient, a customer or an investor, who deals with a stockbroker for the purpose of acquiring and/or selling ofsecurities / derivatives contracts through themechanism provided by the Exchanges.3.2 The term 'stock broker' shall mean and include astock broker, a broker or a stock broker, who has beenadmitted as such by the Exchanges and who holds aregistration certificate from SEBI.26