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Yes!!
Question: What should you do? Answer: Buy Tata Motors Futures instead.
Effect: On buying Tata Motors Futures, you get the same position as Tata motors in the cash market, but you pay a margin and not the entire amount. For example, if the margin is 20%, you would pay only Rs 56. If Tata Motors goes upto Rs 330, you will still earn Rs 50 as profit. Now that translates into a fabulous return of 89% in one month. Unbelievable!! But True nevertheless!!
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This is the advantage of leverage which Stock Futures provide. By investing a small margin (ranging from 10 to 25%), you can get into the same positions as you would be able to in the cash market. The returns therefore get accordingly multiplied.
Answer: The risks are that losses will be get leveraged or multiplied in the same manner as profits do. For example, if Tata Motors drops from Rs 280 to Rs 250, you would make a loss of Rs 30. The Rs 30 loss would translate to an 11% loss in the cash market and a 54% loss in the Futures market.
Question: How long do Futures last and when do they expire? Answer: Futures expire on the last Thursday of every month. For example, January Futures will expire on 31st January (last Thursday).
Answer: Suppose you have bought January Futures on Tata Motors and have not squared up till the end. On 31st January, your Futures will be compulsorily sold at the closing cash market price of Tata motors and your profit or loss will be paid out or demanded from you as the case may be.
Answer: A great advantage of Futures (at the moment) is that they are not linked to delivery which means, you can sell Futures (short sell) of Tata motors even if you do not have any shares of Tata Motors. Thus, you can benefit from a downturn as well as from an upturn.
If you predict an upturn, you should buy Futures and if you predict a downturn, you can always sell Futures thus you can make money in a falling market as well as in a rising one an opportunity that till recently was available only to brokers/operators and not easily to retail investors.
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It does not matter to you what the price is. You will make your profit of Rs 7 anyway. For example, if the price is Rs 450, you will make a profit of Rs 50 on selling your Cash market Reliance and a loss of Rs 43 on buying back Reliance futures. The net profit is Rs 7. On the other hand, if the price is Rs 380 , you make a loss of Rs 20 on selling Cash market Reliance and a profit of Rs 27 on Reliance futures. The net profit remains Rs 7
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Your investment in this transaction will be Rs 400 on cash market Reliance plus a margin of say 20% on Reliance futures (say Rs 80 approx). Thus an investment of Rs 480 has generated a return of Rs 7 i.e. 1.5% per month or 18% per annum. Now take a situation where only 15 days are left for expiry and you spot the same opportunity as above. You will still generate Rs 7 which will translate into a return of 3% per month or 36% per annum.
In this manner, you will generate returns whenever the futures prices are above cash market prices.
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Question: What precautions should I take in such transactions and what risks am I exposed to? Answer: You need to factor in brokerage costs and demat charges for the above transactions. The net returns should be considered for decision making purposes.
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(a) - the same as forward contracts. (b) - standardized contracts to make or take delivery of a Shares/ Commodity at a predetermined place and time. (c) - contracts with standardized price terms. (d) - all of the above.
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(a) - bids and offers. (b) - officers and directors of the exchange. (c) - written and sealed bids. (d) - the Board of Trade Clearing Corporation. (e) - both (b) and (d).
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4. Gains and losses on futures positions are settled: (a) - by signing promissory notes. (b) - each day after the close of trading. (c) - within five business days. (d) - directly between the buyer and seller. (e) - none of the above.
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4. Gains and losses on futures positions are settled: (a) - by signing promissory notes. (b) - each day after the close of trading. (c) - within five business days. (d) - directly between the buyer and seller.
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(a) - increase the number of potential buyers and sellers in the market. (b) - add to market liquidity. (c) - aid in the process of price discovery. (d) - facilitate hedging. (e) - all of the above.
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(a) - increase the number of potential buyers and sellers in the market.
(b) - add to market liquidity. (c) - aid in the process of price discovery. (d) - facilitate hedging.
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6. Hedging involves:
(a) - taking a futures position opposite to one's cash market position. (b) - taking a futures position identical to one's cash market position. (c) - holding only a futures market position. (d) - holding only a cash market position. (e) - none of the above.
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6. Hedging involves:
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(a) - serve the same purpose as margins for common stock. (b) - limit the use of credit in buying commodities. (c) - serve as a down payment. (d) - serve as a performance bond. (e) - are required only for long positions.
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7. Margins in futures trading: (a) - serve the same purpose as margins for common stock. (b) - limit the use of credit in buying commodities.
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8. You may receive a margin call if:(a) - you have a long (buy) futures position and prices increase. (b) - you have a long (buy) futures position and prices decrease. (c) - you have a short (sell) futures position and prices increase. (d) - you have a short (sell) futures position and prices decrease. (e) - both (a) and (d). (f) - both (b) and (c).
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(a) - you have a long (buy) futures position and prices increase. (b) - you have a long (buy) futures position and prices decrease. (c) - you have a short (sell) futures position and prices increase. (d) - you have a short (sell) futures position and prices decrease. (e) - both (a) and (d). (f) - both (b) and (c).
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9 .Standardized futures contracts exist for all of the following underlying assets except: (a) stock indexes. (b) gold. (c)Treasury bonds. (d) common stocks.
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9 .Standardized futures contracts exist for all of the following underlying assets except: (a) stock indexes. (b) gold. (c)Treasury bonds. (d) common stocks.
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10 Which one of the following actions will offset a long position in a futures contract that expires in June? (a) Buy any futures contract, regardless of its expiration
date.
(b) Hold the futures contract until it expires. ( c) Sell any futures contract, regardless of its expiration date. (d) Buy a futures contract that expires in June. (e) Sell a futures contract that expires in June.
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10 Which one of the following actions will offset a long position in a futures contract that expires in June? (a) Buy any futures contract, regardless of its expiration
date.
(b) Hold the futures contract until it expires. ( c) Sell any futures contract, regardless of its expiration date. (d) Buy a futures contract that expires in June. (e) Sell a futures contract that expires in June.
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11 Which of the following does the most to reduce default risk for futures contracts? Marking to market. High liquidity. Credit checks for both buyers and sellers. Flexible delivery arrangements.
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11 Which of the following does the most to reduce default risk for futures contracts? Marking to market. High liquidity. Credit checks for both buyers and sellers. Flexible delivery arrangements.
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Using futures contracts to transfer price risk is called: arbitrage. diversifying. speculating. hedging.
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12 Using futures contracts to transfer price risk is called: arbitrage. diversifying. speculating. hedging.
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13. Which of the following is true? A) The futures market is primarily used by speculators while the forward market is primarily used for hedging. B) The futures market is primarily used for hedging while the forward market is primarily used for speculating. C) The futures market and the forward market are primarily used for speculating. D) The futures market and the forward market are primarily used for hedging.
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What is open interest? Open interest refers to the number of outstanding contracts that remain open. For example, if a position was taken in a contract, and at the expiry of that contract, instead of closing out the position, the trader decided to roll the contract over (ie open a similar position in the next expiry month), their open interest in that contract would continue. If however the trader decided to close out their position, the open interest for that contract would decrease.
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A futures contract is formed when a buyer and a seller take opposite positions in a transaction. This means that the buyer goes long and the seller goes short. Open interest is calculated by looking at either the total number of outstanding long or short positions not both.
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Open interest is therefore a measure of contracts that have not been matched and closed out. The number of open long contracts must equal exactly the number of open short contracts.
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Action
New buyer (long) and new seller (short) Rise Trade to form a new contract.
Existing buyer sells and existing seller buys The old contract is closed.
Fall
New buyer buys from existing buyer. The Existing buyer closes his position by selling to new buyer.
Existing seller buys from new seller. The No change there is no increase in Existing seller closes his position by short contracts being held buying from new seller.
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Open interest is also used in conjunction with other technical analysis chart patterns and indicators to gauge market signals. The following chart may help with these signals.
Price
Market
Warning signal
Weak
Warning signal
The warning sign indicates that the Open interest is not supporting the price direction.
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Hedge Ratio: The Hedge Ratio is defined as the number of Futures contracts required to buy or sell so as to provide the maximum offset of risk. This depends on the
Value of a Futures contract; Value of the portfolio to be Hedged; and
Sensitivity of the movement of the portfolio price to that of the Index (Called Beta).
The Hedge Ratio is closely linked to the correlation between the asset (portfolio of shares) to be hedged and underlying (index) from which Future is derived.
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FUTURES CONTRACTS
Settled daily
MARGINS
A margin in cash or marketable securities deposited by an investor with the broker The balance in the margin account is adjusted to reflect daily settlement
Settlement methods
Delivery
Buyer takes possession of the goods
Cash
difference between the cash market price and the future price
Settlement methods
Delivery
Buyer takes possession of the goods
Cash
difference between the cash market price and the future price
Futures in India
Futures exists in various forms
Commodities (MCX, NCDEX)
Interest rate futures (NSE) Stock and Index Futures (NSE)
Settlement
Trading settlement on NSE
Cash: Rolling Futures settled once a month on NSE
Lot Size
Futures dont trade in quantities of 1
Margin
To buy or sell a future NSE requires a margin
A percentage of each contract size (lot size x price per share)
The actual margin per contract will change every day, calculated by NSE Broker will take this margin money from you Around 15-30% for index futures and 25-60% for stock futures
Eg. Two lots i.e. 100 Nifty at 3000 price, is a contract size of 3 lakhs. Margin will be between 40K to 1L (depending on broker, volatility)
Dec 1: RIL future closed at 1106 Dec 2: RIL future closed at 1075
So Rs. 31 loss is taken from you as Marked to market loss For 150 RIL this is Rs. 4650 that you have to pay
Shorting a future
If you believe RIL will go down in price, you can choose to Sell instead of buy That will create an open sell position for you
If RIL closes at
1200 net profit, over all days added up will be (12001106)
Open Interest
Each buy/sell pair is a contract
Some Terminology
Open interest: the total number of contracts outstanding. This equals to number of long positions or number of short positions Settlement price: the price just before the final bell each day. This is used for the daily settlement process Volume of trading: the number of trades in 1 day
Time
Time
(a)
(b)
Forward Contracts
A forward contract is an OTC agreement to buy or sell an asset at a certain time in the future for a certain price There is no daily settlement . At the end of the life of the contract one party buys the asset for the agreed price from the other party
Profit
Profit
Forward Private contract between two parties Not standardized Usually one specified delivery date Settled at end of contract Delivery or final settlement usual Some credit risk
Futures Traded on an exchange Standardized Range of delivery dates Settled daily Usually closed out prior to maturity Virtually no credit risk
BACK UP SLIDES
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In the "Place Order" page, you need to define the stock code and opt for "Futures" in the "Product" drop down box. On clicking on "Select the contract", the whole list of contracts available in the given stock code expiring in different months would be displayed. Depending on your interest, you can select one of the contracts by clicking on buy / sell link.
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It will take you to the buy / sell page. Values like, your E-Invest account no., exchange, contract details would be auto-populated. You need to define the order type i.e. market or limit, order validity period i.e. day of GTD, limit price and stop loss trigger price if any.
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Can I short sell the shares in futures segment (i.e. sell shares which I do not hold in DP)? Yes, you can short sell the shares in futures segment. There is no block on your holdings in the demat account How much margin would be blocked on placing the futures order?
Initially, margin is blocked at the applicable margin percentage of the order value.
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For market orders, margin is blocked considering the order price as the last traded price of the contract. On execution of the order, the same is suitably adjusted as per the actual execution price of the market order. The initial margin percentage can be checked from the " Stock List" link on the FNO trading page for all underlying securities. You can check the Margin obligations on your position from the "Know Your Margin" link on FNO trading page
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it may not be so. Margin percentage may differ from stock to stock based on the risk involved in the stock, which depends upon the liquidity and volatility of the respective stock besides the general market conditions. Normally index futures would attract less margin than the stock futures due to comparatively less volatile in nature. But all contracts within the same underlying would attract same margin %.
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Can margin be changed during the life of contract? Yes, margin % can be changed during the life of the contract depending on the volatility in the market. It may so happen that you have taken your position and 25% margin is taken for the same. But later on due to the increased volatility in the prices, the margin % is increased to 30%.
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In that scenario, you will have to allocate additional funds to continue with open position. Otherwise it may come in MTM loop and squared off because of insufficient margin. It is advisable to keep higher allocation to safeguard the open position from such events. What is meant by 'squaring off ' a position? What is a cover order? Squaring off a position means closing out a futures position
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For example, if you have futures buy position of 500 Reliance expiring on 27th Feb 2002, squaring off this position would mean taking sell position in 500 Reliance expiring on 27th Feb 2002 on or prior to 27th Feb 2002. The order placed for squaring off an open position is called a cover order. Is margin blocked on all future orders? No. Margin is blocked only on future orders, which results into increased risk exposure.
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For calculating the margin at order level, value of all buy orders and sell orders (in the same underlying-group) is arrived at . Margin is levied on the higher of two i.e. if buy orders value is higher than sell order value, only buy orders will be margined and vice versa. In other words, margin is levied at the maximum marginable order value in the same underlying.
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For example, you have placed the following buy and sell orders.
Contract Details Qty Fut - ACC27 Feb 2002 Fut - ACC26 Mar 2002 100 100 Buy Orders Rate 100 155 Order Value 10000 15500 200 160 32000 Qty Sell Orders Rate Order Value
100
300
16
16300
48300
As mentions above, the higher of buy and sell order value is margined. In the above given example, sell order value is greater than buy order value. Hence margin would be levied at specified margin % on Rs. 48300.
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The order remains passive (i.e. not eligible for execution) till the condition is satisfied. Once the last traded price of the stock reaches or surpasses the SLTP, the order becomes activated (i.e. eligible for execution by being taken up in the matching process of the exchange) and then on behaves like a normal limit order. It is used as a tool to limit the maximum loss on a position.
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Stop Loss Sell Order 'A' buys Reliance at Rs 325 in expectation that the price will rise. However, in the event the price falls, 'A' would like to limit his his losses. 'A' may place a limit sell order specifying a Stop loss trigger price of Rs 305 and a limit price of Rs 300. The stop loss trigger price has to be between the limit price and the last traded price at the time of placing the stop loss order. Once the last traded price touches or crosses Rs. 305, the order gets converted into a limit sell order at Rs. 300
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The order placed for squaring off an open position is called a cover order.
In the example, the order placed to sell 100 Reliance shares is a cover order against the open position 'Bought 100 Reliance Shares'.
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Backwardation: A market where future prices of distant contract months are lower than the near months. Basis: The difference between the Index and the respective contract is the basis i.e. cash netted for the Futures price. A negative basis means Futures are at a premium to cash and vice versa. It is the strengthening and weakening of basis that is tracked by market players i.e. whether the basis is widening or narrowing. A widening of basis is indicative of increasing longs and narrowing means increasing short positions.
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Contango market: This is a market where futures prices are higher for distant contracts than for nearby delivery months.
Cost of carry: is an indicator of the demand-supply forces in the Futures market. It basically means the annualized interest cost players decide to pay (receive) for buying (selling) a respective contract. A higher carry cost is indicative of buying pressure and vice versa. Carry Cost is a widely used parameter not only because it is more interpretable being an annualized figure, as compared to basis (Cash netted for Futures) but also because it works well with the trio of Price, Volume and Open Interest in highlighting the market trend.
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Delivery month: Is the month in which delivery of futures contracts need to be made. Delivery price: The price fixed by the clearinghouse at which deliveries on futures contracts are invoiced. Also known as the expiry price or the settlement price. Derivative: A financial instrument designed to replicate an underlying security for the purpose of transferring risk.
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Fair value: Theoretical value of a futures contract derived from a mathematical model of valuation. Hedge Ratio: The Hedge Ratio is defined as the number of Futures contracts required to buy or sell so as to provide the maximum offset of risk. This depends on the Value of a Futures contract;
The Hedge Ratio is closely linked to the correlation between the asset (portfolio of shares) to be hedged and underlying (index) from which Future is derived. Initial margin: The money a customer needs to pay as deposit to establish a position in the futures market. The basic aim of Initial margin is to cover the largest potential loss in one day. Mark-to-market: The daily revaluation of open positions to reflect profits and losses based on closing market prices at the end of the trading day.
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Forward contract: In a forward contract, two parties agree to do a trade at some future date, at a stated price and quantity. No money changes hands at the time the deal is signed. Futures contract: A futures contract is similar to a forward contract in terms of its working. The difference is that contracts are standardized and trading is centralized. Futures markets are highly liquid and there is no counterparty risk due to the presence of a clearinghouse, which becomes the counterparty to both sides of each transaction and guarantees the trade.
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Far contract: The future that is furthest from its delivery month i. e. has the longest maturity. Speculation: Trading on anticipated price changes, where the trader does not hold another position which will offset any such price movements. Spread ratio: The number of futures contracts bought, divided by the number of futures contracts sold. .
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VaR: Value at Risk. A risk management methodology, which attempts to measure the maximum loss possible on a particular position, with a specified level of certainty or confidence. Strike Price: The price at which an option holder may buy or sell the underlying asset, which is specified in an option contract
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