FUTURE

Arrangement between two parties to buy or sell an asset.

To offset their risk exposures Limit from any fluctuations in price The exchange specifies certain standard features of the contract Standardized contract

FUTURES V/S FORWARDS

Future
Trade on a organized exchange OTC in nature

Forward
Customised contract terms
Less Liquid No margin payment Settlement happens at end of period

Standardized contract terms

More Liquid Requires margin payment Follow daily settlement

FUTURES TERMINOLOGY

Spot price Futures price Contract cycle Expiry date Contract size:

Basis Cost of carry Initial margin Marking-to-market

Maintenance margin

EXAMPLE - FUTURE
Nifty Futures Price Buy @ Rs. 5400 Lot Size 50 Total 2,70,000

Margin: 15% Pay: 40,500 Nifty Futures 5,70 0

PROFIT: 300 300x50: 15,000 Return: 37%