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    Futures

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    Prerak Shah
    A futures contract is an agreement to buy or sell an asset at a predetermined price and date in the future. Futures contracts are standardized and traded on an exchange. The buyer takes on the obligation to purchase the asset and the seller takes on the obligation to provide the asset. Futures contracts can be used for hedging risks or speculative purposes and are broadly classified as financial futures or commodity futures.

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    Futures

    Uploaded by

    Prerak Shah
    23 views7 pages
    A futures contract is an agreement to buy or sell an asset at a predetermined price and date in the future. Futures contracts are standardized and traded on an exchange. The buyer takes on the obligation to purchase the asset and the seller takes on the obligation to provide the asset. Futures contracts can be used for hedging risks or speculative purposes and are broadly classified as financial futures or commodity futures.

    Original Description:

    Futures Contracts Introduction

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    A futures contract is an agreement to buy or sell an asset at a predetermined price and date in the future. Futures contracts are standardized and traded on an exchange. The buyer takes on the obligation to purchase the asset and the seller takes on the obligation to provide the asset. Futures contracts can be used for hedging risks or speculative purposes and are broadly classified as financial futures or commodity futures.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    23 views7 pages

    Futures

    Uploaded by

    Prerak Shah
    A futures contract is an agreement to buy or sell an asset at a predetermined price and date in the future. Futures contracts are standardized and traded on an exchange. The buyer takes on the obligation to purchase the asset and the seller takes on the obligation to provide the asset. Futures contracts can be used for hedging risks or speculative purposes and are broadly classified as financial futures or commodity futures.

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    © All Rights Reserved
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    FUTURES CONTRACTS

    WHAT ARE FUTURES CONTRACTS?

     A futures contract is a legal agreement to buy or sell a


    particular commodity or asset at a predetermined price at a
    specified time in the future.
     Futures contracts are standardized for quality and quantity to
    facilitate trading on a futures exchange.
     The buyer of a futures contract is taking on the obligation to
    buy the underlying asset when the futures contract expires. The
    seller of the futures contract is taking on the obligation to
    provide the underlying asset at the expiration date.
     Two purposes- Hedging and Speculation.
    CLASSIFICATION

    FUTURES CONTRACTS CAN BE BROADLY CLASSIFIED INTO:

     FINANCIAL FUTURES: Single stock, index, currency, bonds etc.

     COMMODITIES FUTURES : Metals, Energy, Grains and Oil seeds,


    Livestock, Food and Fiber etc.
    STEPS IN FUTURES TRADING

     An investor should choose a suitable contract based upon


    exposure and maturity date.
     Place a margin to buy a contract.
     Brokerage and Transaction Fee will be charged
     On a daily basis, Mark to Market will take place.
     Contract is squared off when margin balance is
    exhausted.
     Contract expires on the maturity date,
    MARK TO MARKET

     Purchase price of the contract is the base


     Everyday, difference between previous closing price
    and current closing price is debited/credited to the
    account.
     This debiting/crediting is called MTM.
     MTM happens everyday.
     MTM loss will reduce margin and MTM gain will increase
    margin.
    How Stock Futures are Priced?

    The theoretical price of a future contract is sum of the current spot price and cost of carry.
    However, the actual price of futures contract very much depends upon the demand and
    supply of the underlying stock. Generally, the futures prices are higher than the spot prices of
    the underlying stocks.

    Futures Price = Spot Price + Cost of Carry

    Cost of carry is the interest cost of a similar position in cash market and carried to maturity of
    the futures contract less any dividend expected till the expiry of the contract.

    Example:

    Spot Price of Infosys = 1600, Interest Rate = 7% p.a. Futures Price of 1 month contract=1600 +
    1600*0.07*30/365 = 1600 + 11.51 = 1611.51
    Settlement, Closing and Square up

     Presently, stock futures are settled in cash. The final settlement price
    is the closing price of the underlying stock.

     The investor can square up his position at any time till the expiry.
    The investor can first buy and then sell stock futures to square up or
    can first sell and then buy stock futures to square up his position.
    E.g. a long (buy) position in March Infosys futures, can be squared
    up by selling March Infosys futures.

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