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.
Types of Derivative
 Forwards
 Futures
 Options
 Swaps
Futures

 Futures are specialized form of forward contract.

 Futures are fixed value contract
 They are exchange traded
 Highly liquid than forwards
 No counter party risk exist
 Follow daily settlement
 Always marked to market
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.)
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 650
shares).
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 (last Thursday of the month).
 Investor can buy maximum of three month expiry
period.
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
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
Contd.

 Orders: Trade orders are essentially the manner of buying or

selling items such as currency, which is specified by an investor
to the dealers or brokers.
 Market Order

 Market on Open

 Limit Order

 Stop Order

 Market If Touched

 Good Till Cancelled

 Fill or Kill
Tradable Assets

 Securities, such as individual shares

 Interest rates and indexes
 Currencies
 Tangible commodities such as livestock and meat products;
agricultural products like food, grains and fiber; 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
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 parties
involved.

Clearing- Seller
Buyer
house
TERMINOLOGIES OF FUTURE TRADING

 Spot price
 Futures price
 Expiry date
 Delivery unit
 Basis
 Initial margin
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.
Lot Size

Group of stocks in one future contract

Example:
 RELIANCE INDUSTRIES LTD 250
 RELIANCE INFRASTRUCTU LTD 250
 RELIANCE MEDIAWORKS LTD 1000
 RELIANCE POWER LTD. 2000
 SAIL 1000
 STATE BANK OF INDIA 125
Calculating Profit/Loss

 The profit or loss from a futures position is

calculated as :-
Profit or Loss = Sell Price - Buy Price x Contract
Size x Number of Contracts
Contd.
 An investor purchased 100 Nifty Futures @ Rs. 4200 on
June 10. Expiry date is June 26.
 Total Investment : Rs. 4,20,000. Initial Margin paid :

Rs.42,000
 On June 26, suppose, Nifty index closes at 3,800.

 Loss to the investor (4200 – 3780) X 100 = Rs. 42,000

 The entire initial investment (i.e. Rs. 42,000) is lost by

the investor.
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