Course Instructor: Dr.

Mahesh Sarva

Academic Task No.: CA1

Date of Allotment: 15 th August 2020 Date of submission: 5th October 2020

Student’s Roll no: A17 Student’s Reg. No: 11909837

Evaluation Parameters: (Parameters on which student is to be evaluated- To be mentioned by students as specified at the
time of assigning the task by the instructor)

Learning Outcomes:

Declaration:

I declare that this Assignment is my individual work. I have not copied it from any other student’s work or from
any other source except where due acknowledgement is made explicitly in the text, nor has any part been written
for me by any other person.

Student’s Sign/Name: Aastha gupta

Evaluator’s comments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator’s Signature and Date:

Marks Obtained: Max. Marks:

 FUTURES

A futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a
specified time in the future, between parties not known to each other. The buyer of a contract is said to be the
long position holder, and the selling party is said to be the short position holder. Buyer has the obligation to
buy and seller has the obligation to provide and deliver the underlying asset at the expiration date.

Pros

• Investors can use futures contracts to speculate on the direction in the price of an underlying asset
• Companies can hedge the price of their raw materials or products they sell to protect from adverse price
movements
• Futures contracts may only require a deposit of a fraction of the contract amount with a broker

Cons

• Investors have a risk that they can lose more than the initial margin amount since futures use leverage
• Investing in a futures contract might cause a company that hedged to miss out on favorable price movements
• Margin can be a double-edged sword meaning gains are amplified but so too are losses.
Long Futures Position
The long futures position is an unlimited profit, unlimited risk position that can be entered by the futures speculator
to profit from a rise in the price of the underlying.

The long futures position is also used when a manufacturer wishes to lock in the price of a raw material that he
will require sometime in the future.

Unlimited Profit Potential

There is no maximum profit for the long futures position. The futures trader stands to profit as long as the
underlying futures price goes up.

The formula for calculating profit is given below:

• Maximum Profit = Unlimited

• Profit Achieved When Market Price of Futures > Purchase Price of Futures
• Profit = (Market Price of Futures - Purchase Price of Futures) x Contract Size

Unlimited Risk
Large losses can occur for the long futures position if the underlying futures price falls dramatically.

The formula for calculating loss is given below:

• Maximum Loss = Unlimited

• Loss Occurs When Market Price of Futures < Purchase Price of Futures
• Loss = (Purchase Price of Futures - Market Price of Futures) x Contract Size + Commissions Paid

Breakeven Point(s)
The underlier price at which break-even is achieved for the long futures position position can be calculated using
the following formula.

• Breakeven Point = Purchase Price of Futures Contract

Daily Mark-to-Market & Margin Requirement

The value of a long futures position is marked-to-market daily. Gains are credited and losses are debited from the
future trader's account at the end of each trading day.

If the losses result in margin account balance falling below the required maintenance level, a margin call will be
issued by the broker to the futures trader to top up his or her account in order for the futures position to remain
open.
Short Futures Position
The short futures position is an unlimited profit, unlimited risk position that can be entered by the futures speculator
to profit from a fall in the price of the underlying.

The short futures position is also used by a producer to lock in a price of a commodity that he is going to sell in
the future.

Unlimited Profit Potential

There is no maximum profit for the short futures position. The futures trader stands to profit as long as the
underlying asset price goes down.

The formula for calculating profit is given below:

• Maximum Profit = Unlimited

• Profit Achieved When Market Price of Futures < Selling Price of Futures
• Profit = (Selling Price of Futures - Market Price of Futures) x Contract Size

Unlimited Risk
Heavy losses can occur for the short futures position if the underlying asset price rises dramatically.

The formula for calculating loss is given below:

• Maximum Loss = Unlimited

• Loss Occurs When Market Price of Futures > Selling Price of Futures
• Loss = (Market Price of Futures - Selling Price of Futures) x Contract Size + Commissions Paid

Breakeven Point(s)
The underlier price at which break-even is achieved for the short futures position position can be calculated using
the following formula.

• Breakeven Point = Selling Price of Futures Contract

Daily Mark-to-Market & Margin Requirement

The value of a short futures position is marked-to-market daily. Gains are credited and losses are debited from the
future trader's account at the end of each trading day.

If the losses result in margin account balance falling below the required maintenance level, a margin call will be
issued by the broker to the futures trader to top up his or her account in order for the futures position to remain
open.
 LARSEN & TURBO FUTURES

Near Month Contract

As on 26th aug, took long position, contract expiring on 27th aug 2020.

Cost to carry = -0.90

Lot Size = 550

Contract value = 550*972.75 = 535012.5
Margin = 23.57%
535012.5*23.57% = 126102
Cash available in hand 5,00,000
Therefore, 5,00,000/126102 = 3.9
So, we buy 3 lots.
With 3 lots, no of shares would be 550*3 = 1650
At the cost of = 126102*3 = 378306
We still have 5,00,000 – 378306 = 121694.

Now futures contract value at the time of buying,

550*3*972.75 = 1605037.5
Margin Amount = 126102*3 = 378306
Square off position on 27th aug.

Profit of Rs. 6.25 per share

Future sell price = 979
Future Contract value at the time of selling,
550*3*979 = 1615350
Overall Profit = 1615350 - 1605037.5 = 10312.5
Return generated = 10312.5/378306*100 = 2.7%
Leverage = Contract value/Margin (535012.5/126102) = 4.24
This means for every 1 rupee in the trading account can buy upto 4.24 rupees worth of L&T.
At 4.24 times leverage, L&T has to fall by 1/4.24*100 = 23% to lose all margin amount.2

Payoff Diagram
Next Month Contract

As on 27th aug, took short position, contract expiring on 24th sep 2020

Cost to carry = 1.09

Lot Size = 550
Contract value = 550*981 = 539550
Span Rs. 1,07,300
Exposure margin Rs. 18,819
Total margin = Rs. 1,26,119
Cash available in hand = 5,00,000
Therefore, 5,00,000/1,26,119 = 3.9
So, we sell 3 lots.
With 3 lots, no of shares would be 550*3 = 1650
At the cost of = 1,26,119*3 = 378357
We still have 5,00,000 – 378357 = 121643.

Now futures contract value at the time of selling,

550*3*981= 1618650
Margin Amount = 126119*3 = 378357
Square off position on 28th aug.

Loss of Rs. 13.75 per share

Future buy price = 994.75
Future Contract value at the time of buying,
550*3*994.75 = 1641337.5
Overall loss = 1641337.5 – 1618650 = 22687.5
Loss generated = 22687.5/378357*100 = 59.9%
Leverage = Contract value/Margin (539550/378357) = 1.42
This means for every 1 rupee in the trading account can sell upto 1.42 rupees worth of L&T.
At 1.24 times leverage, L&T has to rise by 1/1.42*100 = 70.42% to lose all margin amount.

Payoff Diagram
Far Month Contract

As on 28th aug, took long position, contract expiring on 29th oct 2020.

Cost to carry = 0.36

Lot Size = 550
Contract value = 550*996.90 = 548295
Span Rs. 324011
Exposure margin Rs. 56705
Total margin = Rs. 380716
Cash available in hand = 5,00,000
Therefore, 5,00,000/380716 = 1.3
So, we buy 3 lots.
With 1 lot, no of shares would be 550
At the cost of = 380716
We still have 5,00,000 –380716= 119284
Square off on 1st sept

Loss of Rs. 29.90 per share

Future sell price = 967
Future Contract value at the time of selling,
550*967 = 53185
Overall Loss = 531850 - 548295 = (16445)
Loss generated = 16445/380716*100 = 4.31%
Leverage = Contract value/Margin (548295/380716) = 1.44
This means for every 1 rupee in the trading account can buy upto 1.44 rupees worth of L&T.
At 1.44 times leverage, L&T has to fall by 1/1.44*100 = 69% to lose all margin amount.

Payoff Diagram