Futures Contracts in India

by
Vipul Mehta
Financial Derivatives
 Derivative – Financial product whose value is derived
from an underlying asset
 Underlying asset can be
 Commodity – wheat, rice, soya etc.
 Stocks – Reliance, HDFC, Raymond etc.
 Indices – Nifty, Bank Nifty etc
 Other underlying assets and their derivatives
The Index
 NIFTY
 BSE SENSEX
 Other key world indices
 S&P 500
 DOW JONES INDUSTRIAL AVERAGE (DJIA)
 FTSE 100
Index Futures
 Index Futures
 Nifty Jul Futures
 Bank Nifty Jul Futures
 Contract specifications
 Expiry date
 Contract size or Lot size
 No of contracts running
 Near month, mid month, far month
 Order type
 Quantity freeze
 NSE India Nifty Futures: https://goo.gl/B3P4y2
Positions
 Long Position
 Short Position
Futures Contracts
 Cash settlement v. Physical settlement
 At the expiration of the contract, the commitment under the
futures contract is not settled by outright delivery
 Margin requirements
 Initial Margin (Span Margin)
 Exposure Margin
 Margin types: https://goo.gl/orhCHe
 Margin required for NSE securities: https://goo.gl/NLhehZ
 Derivatives trading extension to 1155: https://goo.gl/4qfvkY
 Margin MTM Calculation: https://goo.gl/fzChbd
 Mark to Market Margin
The following are the prices of NIFTYAUG18FUT for the last 7 days.
Let’s say you purchased one lot of Nifty Futures on 26 Jul at 11200.
Compute the mark-to-market margin you will receive/pay for one lot
of Nifty Futures at the end of each day. If the initial margin required is
Rs 66000, how much would be added/subtracted from your margin
account every day?
Date Close
26-Jul-18 11201.35
27-Jul-18 11306.7
30-Jul-18 11338.5
31-Jul-18 11371.6
01-Aug-18 11374.3
02-Aug-18 11282.3
03-Aug-18 11395.75
Hedging using Index Futures
 Long on Stocks, short on Index Futures
Hedging using Other Futures
 Similarly Long and Short positions in Futures can be used to
hedge in any financial product
Benefit of Futures Contracts
 Hedging
 Leverage
 Financial Leverage
Cost of Carry
 Cost of carry model states that there is a cost associated with
buying/selling futures
 Carrying cost includes the cost incurred in holding the underlying
asset till the strike date by the party who is short on futures
 Other costs included in carrying cost: Dematerialization charges
and other transaction costs

F=S+C

F = Price of Futures contract

S = Spot price of the underlying asset
C = Carrying cost, i.e. Holding cost
Cost of Carry
 Cost of carrying or holding a hedged futures position for the
underlying asset
Futures Price = Spot Price x (1+r)t
Futures Price = Spot Price x ert
Calendar Spread using Futures
 Consider Reliance Futures
Solve
 Let’s say the price of a stock is Rs 510. What would be the
price of the futures of the stock which is expiring in 90 days
(taking risk-free rate of interest at 7%)?
 Let’s say the current price of the futures is
Case I: Rs 530
Case II: Rs 512
 Let’s say the price of the stock after three months is Rs 525.
How can a skilled arbitrageur take advantage of these price
differences?
Calendar Spread Using Futures
August Start
Spot Rs 100
Risk-free rate 7%
Time One, two, three month futures

Theoretical Actual
futures price futures price
August futures 102.5
September futures 101
October futures 100.5
Solve
 A factory owner needs 15,000kg of a raw material for his
production due to start after one month. He fears that the
prices might go up. He is prepared to spend Rs 10/kg which
is the current spot price. He does not want to buy the raw
material right now. If one month futures on this raw material
are currently going at Rs 10.10, show his payoff if the spot
price after one month is:
Case I: Rs 18/kg
Case II: Rs 8/kg
Solve
 A farmer produces wheat and is expecting produce of
100,000kg to be ready in a month. The spot price is Rs 100
per kg and he fears the prices may come down. The one
month futures on wheat is available at Rs 105. Show his
payoff if the prices after one month turn are following:
Case I: Rs 90/kg
Case II: Rs 110/kg