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DERIVATIVE

A financial contract of pre-determined duration,

whose value is derived from the value of an

underlying asset.

Stocks

Bonds

Commodities

Currencies

Interest rates and market indexes.

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Types of Derivative

Forwards

Futures

Options Swaps

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Futures

Futures are specialized form of forward contract.

Futures are fixed value contract

T

hey are exchange traded Highly liquid than forwards

No counter party risk exist

Follow daily settlement

Always marked to market

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Futures contract

Futures contract is nothing but an agreement

between 2 parties to buy or sell an underlying

asset at a specified time in the near future at a

certain price.

Stock Futures Contract.

Index Futures Contract (like Dow Futures, Nifty

Futures, Sensex Futures, etc.) Commodity Futures (like Gold Futures, Crude Oil

Futures, etc.)

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Future Trading

An investor purchased HPCL Future contract (lot of

650 shares)@ Rs. 300 per share.

Total Investment : Rs.1,95,000 (650*300)

Margin payment :Rs 28,000

Next day price moves to Rs 302.

The difference is Rs 2 per share (302-300)

Investor get credit of Rs 1300 (Rs 2 per share x 650shares).

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Contd.

If price dips to Rs 297.

The difference is Rs 3 per share (300 - 297)

Since the price has dipped, Rs 1,950 (Rs 3 per

share x 650 shares) is debited from investor

account.

This will go on till investor sell the Futures contract

or it expires (lastT

hursday of the month). Investor can buy maximum of three month expiry

period.

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Future Exchange

A futures exchange or derivatives exchange is a

central financial exchange where people can trade

standardized futures contracts.

National Stock Exchange of India (NSE)

Bombay Stock Exchange (BSE)

Multi Commodity Exchange of India (MCX)

National Multi Commodity Exchange of India (NMCE) National Commodity and Derivatives Exchange

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Basics of Futures Trading

Margin

A good-faith deposit (or performance bond) made

by a prospective trader with a broker. Margin can

be posted in cash or bank letter of credit.

Three types of margin:-

Initial Margin

Maintenance Margin Variation Margin

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Contd.

Orders: Trade orders are essentially the manner of buyingor selling items such as currency, which is specified by aninvestor to the dealers or brokers.

Market Order

Market on Open Limit Order

Stop Order

Market IfTouched

Good Till Cancelled Fill or Kill

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Tradable Assets

Securities, such as individual shares

Interest rates and indexes

Currencies

Tangible commodities such as livestock and meatproducts; agricultural products like food, grains andfiber; forms of energy like natural gas, and crude oil

Precious metals gold, silver, platinum; industrial metals

such as nickel, copper, lead and iron; and rare metals Environmental commodities

Bonds

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Clearinghouse

A clearinghouse is agency associated with an

exchange, which settles trades and regulates

delivery. Clearinghouses guarantee the fulfillment

of futures contract obligations by all partiesinvolved.

BuyerClearing-

houseSeller

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TERMINOLOGIES OF FUTURE

TRADING

Spot price

Futures price

Expiry date Delivery unit

Basis

Initial margin

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Contd

Marking-to-Market: At the end of each trading day,

the margin account is adjusted to reflect the

investors gain or loss depending upon futures

closing price.

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Lot Size

Group of stocksin one future contract

Example:

RELIANCE INDUSTRIESLTD 250

RELIANCE INFRASTRUCTULTD 250

RELIANCE MEDIAWORKSLTD 1000

RELIANCE POWERLTD. 2000

SAIL 1000

STATE BANKOFINDIA 125

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Calculating Profit/Loss

Theprofit or loss froma futuresposition is

calculated as:-

Profit orLoss = Sell Price - Buy Price x Contract

Size x Number of Contracts

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Contd.

An investorpurchased 100 NiftyFutures @ Rs. 4200 on

June 10. Expiry dateis June 26.

Total Investment :Rs. 4,20,000. Initial Margin paid :

Rs.42,000

On June 26, suppose, Niftyindex closesat 3,800.

Loss to theinvestor (4200 3780) X 100 = Rs. 42,000

Theentireinitial investment (i.e. Rs. 42,000) is lost bytheinvestor.

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Advantages of Future Trading

Futures trading allows investor to trade in 'large

amounts' with low cash.

Trading in stock market Futures is usually less

expensive than actually buying stocks.

Paper Investment

Possible to do short selling

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