Futures - Backlog of Finance/Stock Market

IMPORTANT:

This time we thought to write on something different & the first thing that came into our mind was “Futures“. The one who can’t relate to it – It’s the chapter that you will be studying in SFM as well it is the most important term in Stock Market & Finance.

FUTURES – BACKLOG OF FINANCE/STOCK MARKET

Objective:

The objective of this Article is to help the students in understanding “ FUTURES “ both from point of view of SFM as well as Stock Market.

The Article will be really Precise as well as simple.

Scope of Article:

• Different segments in Market
• Positions in Market
• I.M.R, MTM & Maintenance Margin
• Fair Future Price
• Arbitrage

So let’s start with the Article –

BASIC TERM:

1. Maximum Period – 3 Months
2. Maturity Date -  Last Thursday of the Month

Segments in Market:

There are two segments in Market:- 

1. CASH SEGMENT
2. DERIVATIVE SEGMENT

Let’s discuss one by one:

CASH SEGMENT:

Contracts which are entered today for either buying or selling as on today. It means if Mr. X enters into a contract to sell 20 shares in the evening, so it will be a case of “CASH SEGMENT “

DERIVATIVES SEGMENT:

Contracts which are entered today for future Buying & Selling. It means if Mr. Y enters into a contract today for buying shares at some future date. It will be a case of “DERIVATIVES”.

POSITIONS IN DERIVATIVE SEGMENT:

1. LONG POSITION
2. SHORT POSITION

LONG POSITION:

1. It means entering today for buying at some future date.
2. Long means to buy or to Purchase at some future Date.

 SHORT POSITION:

1. It means entering today for selling at some future date
2. Short means to sell at some future date.

HOW TO SETTLE THE DERIVATIVES?

1. The short & simple answer to it will be by taking opposite Position in the Market
2. If you have contacted to take Long in future then it will be settled by taking Short in the Marked & Vice Versa

I.M.R, MTM & Maintenance Margin

INITIAL MARGIN REQUIREMNT:

1. Before entering into a future Contract, every Contracting Party is required to deposit certain amount which can be treated as “Security Deposit“.
2. It is a requirement imposed by SEBI so it needs to be followed anyhow.
3. It is calculated on Contacted Value.

MARK TO MARKET MARGIN:

1. If the party wants to know the daily balance in his/her account i.e. Profit or Loss in the account we can calculate by preparing M.T.M
2. It’s also called Daily Profit or Loss Account.

MAINTENANCE MARGIN:

1. It’s a deadline or limit below which our Closing Balance should not Fall
2. This Limit is regulated by SEBI (Security Exchange Board of India)
3. If our balance falls below the said limit, in this case we need to deposit an additional amount to make it equal to IMR.

FAIR FUTURE PRICE:

1. It is the future price of security which can be called as “Optimum“
2. Fair means it will be equal to Break Even Point i.e. No Profit No Loss situation
3. By point of View of Investors it is called as “ What the amount of security Should be in Future i.e. Fair Price of Security

How to Calculate FFP?

RETURN  

• ABSOLUTE AMOUNT  PERCENTAGE  
• Current Market Price – P.V of Return  RATE OF RETURN - %    

COST      

• ABSOLUTE AMOUNT   PERCENTAGE  
• Current Market Price + P.V of Cost    RATE OF RETURN +%  

ARBITRAGE:

1. In simple words it means that “ Buy Low Sell High “
2. He always takes two Positions in the Market
3. He always work for Profit & Never Takes Risk
4. He never uses his own money, he always borrows
5. He sells what is overvalued & Buy what is undervalued.

HOW TO CALCULATE ARBITRAGE PROFIT?

AFP MORE THAN FFP – (EXPLANATION)

1. It means that the Investor thought that the Price of the share after 2 Months (FFP) will be Rs. 100 but actually after 2 Months it turned out to be Rs.120.
2. So in this case what we will do is, we will sell the share in the Future Market @ 120, before that we will purchase it in the Cash Market at present @ Rs.100.
3. So to purchase the share we need some amount that we will borrow from the Bank @ 10% Interest.

SALE OF SHARE (After 2 Months) – 120 (+)

PAYMENT TO BANK (WITH INTEREST) – 105 (With Interest)

ARBITRAGE PROFIT - Rs.15