ift financial futures

8/9/2019 Ift Financial Futures

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y Difference between Futures and Forwards

y Future Price Quotations

y Clearing House Mechanismy Marking-to-Market

y Currency option



Futures contract

y Involves an agreement between two parties to buy/sellan asset at a predetermined price on a future date.



Diff erence between Futures and

Forwardsy Location

y Size of Contract

y Maturity/payment datey Market place

y Valuation

y Variation margins

y Regulation

y Credit Risk



Futures Price Quotationsy Future contracts are generally traded in the cycle of March,

June, September and December for Delivery/Settlementy Open opening price of the futures on the floor of the

exchange which occurred during the trading hours.

y Latest is the settlement price or closing price of the

contract on the exchange.y Change price difference between settlement prices of

that day and of the previous day.

y High The highest price of a trade recorded during theday.

y Low - The lowest price of a trade recorded during the day.y Estimated v olume are total no. of future contracts that

are traded during the day.

y Open Interest represents the number of outstanding

future contracts.



CURRENCY FUTURES QUOTES

Japanese Yen GBX

y SOUR CE: http://futures.tradingcharts.com/marketquotes/J6.html



METAL FUTURES QUOTESGOLD

y SOURCE : http://futures.tradingcharts.com/marketquotes/GC_.html



y Functions of a Clearing House

y Ensuring adherence to system and procedure for smoothtrading

y Minimizing credit risk by being a counter-party to alltrades

y Accounting for all the gains/losses on daily basis

y Monitoring maintenance of speculation margins

y Ensuring delivery of payment for the assets on thematurity date for all the outstanding contract.



T ypes of member who trade :-

* Floor Brokers

* Floor Traders

# Scalpers

# Position traders



Procedurey who wants to trade must have account with a member

of exchange

y They give instruction to member to execute theirorder on their behalf

y The trade detail are reported to the clearing house



Marginsy Main feature of future market

y Paying only the margin money and not the whole

amounty To be deposited at the time of entering into contract

y Varies from contract to contract depending on thefeature of underlying assets ( volatility, duration of

contract )y Usually in the form of T-bill, cash



Marking to MarketThe mechanism of adjusting everydays profit or lossin the market is known as Marking to Market. In this

the investor has to increase the margin if he has incura loss for the day and can withdraw the excess if he hasmade a profit.



Orders in f uture markety Market order

y Market if touched (MIT)

y Time ordery Limit order

y Stop loss order



HEDGING USING CURRENCY FUTURESy Plays a Vital in the futures market.

y Not similar to manipulation



y As with other types of financial products, hedging may allow for economic activity that would otherwise not

have been possible .y As a loan, for example, may allow an individual to

purchase a home that would be "too expensive" if theindividual had to pay cash.

yThe increased investment is assumed in this way toraise economic efficiency.



SPECULATION USING FUTURESy Plays a Vital in the futures market.

y Not similar to manipulation



LONG POSITIONS IN FUTURESy The pay-off of a long position in a future contract,

demonstrates that the pay-off of a trader is a linear

derivative, that is, he makes unlimited profit if the

market moves as per his directional view, and if the

market goes against, he has equal risk of makingunlimited losses if he doesnt choose to exit out his

position.



SHORT POSITIONy Short position in a currency futures contract without any

exposure in the cash market is called a speculativetransaction. Short position in futures for speculative

purposes means selling a futures contract in anticipation of y decline in the exchange rate (which actually means sell

the base currency (USD) and buy the terms currency (INR)and you want the base currency to fall in value and then you would buy it back at a lower price).

y If the exchange rate weakens before the expiry of thecontract, then the trader makes a profit on squaring off the

y position, and if the exchange rate strengthens then thetrader makes loss

ift financial futures

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