9.3 Futures Contract Introduction 9.3

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FUTURES CONTRACT INTRODUCTION

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Understanding Futures Contract
Futures contracts are trades between two individuals amongst which one is a seller and the other
is a buyer of the futures contract. Futures trade is where the buyer agrees to purchase a
predefined amount of shares at a particular price from the seller at a specific time (expiry) in the
future.
These future contracts are standardized in nature where the number of shares being transacted in
each contract is defined by the stock exchange as lot size. Futures contracts can be traded on the
stock exchange and the stock exchange honors the future contracts in other words while settling
the trade the stock exchange considers the trader interest.
Future contracts can be for different assets like stocks, commodities, currency etc.
A. Directional View
If the trader is of the opinion that the price will go up then he will buy Futures and if he feels the
price will go down then he will sell Futures.
The 3 Possible scenarios post the Futures Trade
Win a Badge! a. The price will go up; this result will benefit the Buyer. At the end of the day the seller will pay the
FINISH ALL CHAPTERS AND difference between the open and close price to his broker who will pay to exchange and exchange
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b. The Price will go down; this result will benefit the Seller. At the end of the day the Buyer will pay
the difference between the open and close price to his broker who will pay to exchange and
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a. Once a Futures Contract is entered into both the Buyer and Seller can sell or exit their position
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b. The profit or loss can be booked anytime during the contract.
c. In other words there is no obligation for either party to hold on to the contract till expiry.
1
BEGINNERS G… Understanding Leverage 41
Rajesh wants to buy a property at a new project in Mumbai. The Initial Value of Apartment is Rs. 14
2 DERIVATIVES … 10,000,000 and initial payment to be made to builder is 1,000,000 which is about 10% of
apartment value in order to block the flat. Balance 90% payment to the builder is to be paid on
later date. A supermall opens nearby which helps apartment price to rise by 25%. The new price
of the apartment comes to 12,500,000. A new buyer approaches Rajesh and pays him 3,500,000
3 FUTURES CO… upfront and agrees to pay the initial balance of 9,000,000 to the builder. Thus, Rajesh's profit
comes to 2,500,000 after deducting the initial payment of 1,000,000 and the profit percentage
comes to 250%.
4 OPTIONS CO… The ability to participate in high amount transactions by depositing a marginal amount
The opportunity to gain or maximize gain from Leverage benefit provided by Futures
Understanding Initial Margin and Mark-to-Market Margin
a. Initial Margin - The initial Margin is a deposit which both the buyer and seller need to pay to
enter into a Futures Trade. The Exchange takes the Deposit to protect both the parties from non-
payment risks
b. Mark-to-Market Margin - Mark-to-Market Margin is calculated on a daily basis. The amount is

withdrawn from loss making party account and deposited to profit making party account
Futures Price
The Price at which the Futures Trade is entered into is called as a Futures Price. The movement
of futures price has a similar directional movement with the Market Price. Futures Price Close of
the Day becomes Open Price for the next day trade. The reason for this is the difference in the
amount (Profit/Loss) is transferred to the respective party on a daily basis.During the Life of the
Futures Trade Futures Price do not match with the spot Price. As the trade nears maturity the
Futures Price gets closer to the Market Price and eventually meets the market price at expiry
(Similar to Futures meeting reality).
Volume
In Futures when there is 1 Buy trade and 1 Sell trade, then it translates into Volume of 1 trade.
Open Interest
Number of active trades in the market tells us about the volume of Open Interest in the market.
Open Interest is an indicator which tells us a directional viewpoint of Futures trade.
They change every day as market acts to daily news and the view of market direction whether it
will move up or down changes on a daily basis.
Once a Futures trade is entered into both the Buyer and Seller can
sell or exit their position anytime.There is no obligation for either
party to hold on to the contract till expiry
KEY TAKEAWAYS:
Futures trade enable traders to hold large quantity of Stocks or Index by paying small fraction of
Margin
Futures trade enable traders to earn more than average profits
Win a Badge! Moreover there is high Liquidity (high number of buyers and sellers) which enable traders to buy
and sell Futures trade anytime.
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1/28/2021 Futures Contract Introduction

BSE 500: 18358.67 -1.66% Pound to INR: 99.73 -0.23%

COURSE Quotes TRADE NOW

0/4 CHAPTERS 0/4 QUIZZES

FUTURES CONTRACT INTRODUCTION

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BSE 500: 18358.67 -1.66% Pound to INR: 99.73 -0.23%

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Previous Course Next Course

BSE 500: 18358.67 -1.66% Pound to INR: 99.73 -0.23%

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Understanding Futures Contract

The 3 Possible scenarios post the Futures Trade

Derivatives Taking a Trading Opportunity

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Understanding Initial Margin and Mark-to-Market Margin

b. Mark-to-Market Margin - Mark-to-Market Margin is calculated on a daily basis. The amount is

Open Interest is an indicator which tells us a directional viewpoint of Futures trade.

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Investment Markets Insights Important Main Office Address

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