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Futures Contracts

Tasneem Chherawala
NIBM 2015

Futures Contracts
Exchange traded forward contract between two parties, where one
commits to buy an asset and another to sell an asset on a specified
future date.
The exchange establishes standardized futures products
The standardized terms in the contract are for

Quantity and Quality of Underlying Assets


Expiration Dates of Contracts
Delivery Period and Locations
Payment and Settlement terms
Units of Price Fluctuations

Other specifications of the exchange

Trading days and hours


Daily Price Limits
Position Limits
Margins

S&P CNX Nifty Futures on NSE


SYMBOL

N FUTIDX NIFTY

CONTRACT SIZE

Permitted Lot Size 50 (Minimum Value Rs. 2 lakh)

UNDERLYING

S&P CNX Nifty

PRICE STEPS

Rs. 0.05

PRICE BAND

Operating Range of 10% of Base Price

CONTRACT TRADING CYCLE

3 Month Trading Cycle: Near Month (one), Next


Month (two), Far Month (three)

EXPIRY DAY / LAST TRADING DAY

Last Thursday of the Expiry Month or the previous


trading day if the last Thursday is a trading holiday

SETTLEMENT

Daily and Final Settlement on T+1 Basis

MODE OF SETTLEMENT

Cash Settled In Indian Rupees

DAILY SETTLEMENT PRICE

Closing price of the futures contract for the trading


day

FINAL SETTLEMENT PRICE

Closing value of the underlying index on the last


trading day

Currency Futures on NSE


SYMBOL

USDINR

UNIT (CONTRACT SIZE)

1 ( 1 Unit denotes 1000 USD)

UNDERLYING

INR/USD Exchange Rate

TICK SIZE

Rs. 0.25Paise or INR 0.0025

CONTRACT TRADING CYCLE

12 Month Trading Cycle

EXPIRY DAY / LAST TRADING DAY

2 Working days prior to the last business day of the


expiry month at 12 noon

FINAL SETTLEMENT DAY

Last working day (excluding Saturdays) of the expiry


month.

SETTLEMENT

Daily Settlement: T+1


Final Settlement: T+2

MODE OF SETTLEMENT

Cash Settled In Indian Rupees

DAILY SETTLEMENT PRICE

Calculated on the basis of last half an hour weighted


average price.

FINAL SETTLEMENT PRICE

RBI Reference Rate

PRICE BAND

Tenure upto 6 months +/-3 % of base price,


Tenure greater than 6 months +/- 5% of base price

The Exchange
The exchange offers standardized derivative contracts
on various underlying assets (physical commodities,
risks, foreign currency and financial products) for trading
It comprises members that
Trade on the exchange
Control the operations of the exchange

The exchange provides a platform for buyers and sellers


of futures to provide transparent bids and offer prices on
different contracts
Physical platform Open Outcry
Electronic Trading platform

As On 24-SEP-2015 17:00:00 Hours IST


Contract

Best Bid

Best Ask

Volume
Value (in
(Contrac
OI
Rs. Crores)
ts)

Spread LTP

USDINR 280915

782

66.18 66.1875

85 0.0075

USDINR 281015

12

66.55 66.5575

296 0.0075

USDINR 261115

12

66.895

66.91

0.015

66.9025

EURINR 280915

74.43

74.44

38

0.01

EURINR 281015

74.77 74.8075

EURINR 261115

10 75.1025

75.15

GBPINR 280915

44 100.8375 100.8475

GBPINR 281015

101.32 101.3975

GBPINR 261115

5 101.7525 101.9225

No. of
Trades

66.191867832 12,358.27 932,170


3,506.05 624,164

21358

41318

276.29 149,986

2057

74.44

71284

528.67 25,155

10232

9 0.0375

74.7875

29241

217.92 33,310

3201

1 0.0475

75.1225

953

0.01 100.8375

4 0.0775 101.3975

12

13

66.5575 527091

51145

7.13

2,669

178

46077

465.44 21,147

9223

21261

215.77 24,736

3054

0.17

101.755

544

5.55

862

107

JPYINR 280915

19

55.325 55.3475

19 0.0225

55.35

21393

118.11

6,820

3844

JPYINR 281015

10

55.62 55.6325

45 0.0125

55.6325

6510

36.13

6,545

802

JPYINR 261115

55.92

39

0.22

392

20

55.845

55.9

0.055

As on 24-Sep-2015 13:05:00
Underlying
RBI Reference Rate
1$
66.0993
1
100.8874
1
73.9585
100
55.08

as on Sep 24, 2015 15:30:32


IST
Underlyin
Open
Expiry Date
g
Price

High Price Low Price

Prev
Close

Last Price

Volume
Turnover
(Contracts) (Lacs)

Underlying
Value

NIFTY

24-Sep-15

7,826.50 7,896.00

7,797.15 7,855.45

7,869.15

6,69,444 13,13,519.42

7868.5

NIFTY

29-Oct-15

7,879.35 7,933.75

7,832.55 7,888.75

7,895.90

4,36,425 8,60,162.03

7868.5

NIFTY

26-Nov-15

7,897.65 7,965.00

7,865.00 7,918.50

7,930.00

BANKNI
FTY

24-Sep-15 17,222.05 17,277.85 17,054.15 17,273.70 17,197.40

BANKNI
FTY

29-Oct-15

BANKNI
FTY

17,308.05 17,382.00 17,173.65 17,371.85 17,310.10

26-Nov-15 17,395.85 17,470.00 17,275.00 17,483.45 17,411.00

2,332

13,843.51

7868.5

1,57,685 6,76,785.60 17196.65


91,860 3,96,812.69 17196.65
1,029

5,364.89 17196.65

Trading History: USDINR 28-Sept-2015


Contract
Trade
Open
Close
Date
Price
High Price Low Price Price
24-Sep15 66.2125 66.2875
66.05 66.2125
23-Sep15 66.0875 66.1475
65.915 66.0425
22-Sep15 65.7975 66.0275 65.6175 65.9625
21-Sep15
66.02
66.08 65.6875
65.82
18-Sep15 66.2975
66.335
65.765 65.8175
16-Sep15 66.5675 66.6175 66.4475 66.5625
15-Sep15
66.46 66.6275
66.46 66.5175
14-Sep15 66.6325 66.6725 66.4775 66.5125
11-Sep15
66.6 66.7775 66.5175
66.75
10-Sep15 66.8725
66.98
66.625
66.65

Daily
Settlemen Open
t Price
Interest

No. of
Contract Value (Rs.
s
lakhs)

66.2125 9,32,170

1867832 12,35,826.85

66.0425 10,94,033

1624424 10,72,755.55

65.9625 12,30,544

1502491 9,88,735.04

65.82 12,96,540

1467546 9,65,956.62

65.8175 12,39,454

2128148 14,04,949.48

66.5625 11,02,627

1031869 6,86,584.98

66.5175 11,62,700

1115565 7,42,487.20

66.5125 13,88,923

797776 5,30,929.11

66.75 14,05,331

891098 5,93,934.11

66.65 13,82,579

1256770 8,39,220.03

The Clearing House


The Clearing House is an agency associated with the
Exchange that settles the trades and regulates delivery.
It guarantees the fulfillment of the futures contract
obligations by all parties involved
It becomes a counterparty to each buyer and seller of
futures contracts such that traders have obligations and
rights on the clearing house and not to other traders
It is perfectly hedged and does not maintain futures
positions for itself

The Clearing House


Clearing house becomes the counter party to the original
parties
Buyer

Clearing
House

Seller

The clearing house also "clears": if A buys from B and


then some time later sells to C, the clearing house
cancels out both of A's contracts, and only the contracts
with B and C remain outstanding.

Clearing
A
Buy 1

CH

OI Volume
B
Sell 1

Cancelle
d

C
Buy 1

CH

A
Sell 1

C
Buy 1

CH

B
Sell 1

D
Buy 1

CH

E
Sell 1

ed
Cancell

E
Buy 1

CH

F
Sell 1

D
Buy 1

CH

F
Sell 1

Clearing
A Traders Position in a Specific Futures Contract
Day

Transaction

No. of Contracts

Open Position

Buy

200

+200

Sell

400

-200

Sell

300

-500

Buy

100

-400

Buy

500

+100

Sell

100

On Day 6, the Trader has fully offset his position in the Futures
Contract

Settlement Mechanism on Expiry


Physical Settlement: entails making (taking)
delivery of the underlying after expiry of the
contract and receipt (payment) of cash in
designated currency
The asset to deliver, the location of delivery, the time
of delivery, the proof of delivery
The location of settlement, the bank account for
settlement, the time of settlement

Cash Settlement: entails a net receipt (payment)


of cash in designated currency
The location of settlement, The time of settlement
The bank account for settlement

Risk Management and Margins


Trading on futures contracts implies no counterparty
credit risk since all obligations are guaranteed by the
clearing house
To minimize its risk in such a guarantee, the exchange
requires all traders, when they take a position in futures
contracts to post margin amounts with the clearing
house designated banks.
Primarily, there are 3 types of margins
Initial margin
Maintenance margin
Variation margin

Risk Management and Margins


Initial margin is an amount posted upfront by the trader
in the clearing house designated bank at the time when
the trader takes a position in a futures contract
Maintenance margin is an amount required to be
maintained for the entire period that the trader holds a
position in a futures contract
It accounts for daily mark to market value of the position
in the futures contract.

Margins for Currency Futures on


NSE
USDINR

EURINR

GBPINR

JPYINR

Minimum
Initial Margin
SPAN Based

2% of the
2% of the
initial
initial
value of
value of
the
the
position
position

2% of the
initial
value of
the
position

2.3% of the
initial
value of
the
position

Extreme Loss
Margin
(Maintenan
ce Margin)

1% of the
0.3% of the
MTM
MTM
value of
value of
gross
gross
open
open
position
position

0.5% of the
MTM
value of
gross
open
position

0.7% of the
MTM
value of
gross
open
position

Margins for Stock and Index


Futures
Visit the NSE F & O Website for more
details

Types of Settlement on Futures


Contracts
Daily Mark-To-Market (MTM) Settlement: daily gains (or
losses) on a futures contract are credited (or debited) on
daily settlement dates till an open position is maintained
on that futures contract
Final Settlement: the final gain (or loss) on a futures
contract is credited (or debited) on the final settlement
date of the contract (after the last trading day of the
contract) based on the spot price of the underlying on
expiry date

Daily Mark-To-Market Settlement


Every open position in each contract is marked to the market
daily through an end of day valuation process
The Daily Settlement Price (DSP) of each futures contract for mark to
market settlement is calculated on the basis of the end-of-day traded
price of the futures contract.
If there is no trading on the contract the theoretical price is taken.

Every position in a futures contract makes a gain or a loss


depending on the on the DSP and the investors position
(long or short); realized through adjustment in the margin
(Variation Margin)
If the trader makes gains, these are credited to the margin account
and amounts exceeding the maintenance margin can be withdrawn
If the trader makes losses, these are debited from the account until
margin amount in the account drops below maintenance level.
When this happens, the trader receives a Margin Call whereby the
shortfall has to be remitted promptly

Daily Mark-To-Market Settlement


This daily cash adjustment through variation margin
collects from the loser and pays to the winner each day,
with no extension of credit whatsoever.
Unlike the Forward Contract, Daily Mark-To-Market
Settlement ensures that gains or losses arising from
daily changes in the value of the futures contract are not
allowed to build up
Thus, at any point of time, the position gains or losses
are restricted to those arising from last one days price
movements. All previous losses have been settled
This minimises the incentive to default and reduces
counterparty default risk

Closing of Open Positions in


Futures Contracts
Futures can be closed through:
Holding the contract till expiry
Cash settlement through a reverse trade on any day
Buyers of futures contracts can close out their positions
by selling similar futures contracts.
Sellers may also close out their positions by purchasing
similar contracts.
Most futures contracts are closed out before their expiry
dates.
If futures traders maintain open positions till expiry of the
contract, the exchange will automatically close the
position on the date of expiry by paying or withdrawing a
final variation margin based on the Final Settlement Price

Currency Futures - Uses


Speculation with Currency Futures
Fluctuations in exchange rates used to reap speculative
profits
Spot rate: USD = Rs.55.5
1 month future rate: USD = Rs.56.00
Expected spot rate on maturity: USD = Rs. 56.60
Dealer buys 100 currency futures contracts of size 1000
USD
Value of contract: Rs.55,50,000; Margin deposit:
Rs.1,11,000
If exchange rate move up to Rs.56.6 as anticipated,
dealer gains profit of Rs.60,000 (100,000* Rs.0.60)
Rate of return: (60000/11100) =54%

Currency Futures - Uses


Versus Speculation through Cash Transactions
Spot rate: USD = Rs.55.5
Dealer buys 100,000 USD at spot rate
Investment required: Rs.55,50,000
If exchange rate moves upto Rs.56.6 within a month,
dealer gains profit of Rs.1,10,000 (100,000* Re.1.1)
Rate of return: (11000/55,50,000) = 2%
Speculation with currency futures - larger returns on
smaller investment

Currency Futures - Uses


Hedging with Currency Futures
Currency futures may be purchased by participants to
hedge foreign currency payables, or sold to hedge
receivables.
Importer buys the required currency futures contract
Thus locks in a price for the purchase of foreign
currency
Exporter sells the expected currency futures contract
locks in a price for the sale