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• The forward price of the asset is Rs. 20 per kg for wheat, and Rs 55 for
dollars.
Features of a Forward Contract
– Two parties (buyer and seller)
– OTC
– Price is determined today
• (Price is negotiated in advance)
– Mutual Obligation to Perform
• ( on maturity, seller makes the delivery and buyer pays the price)
– Counter Party Risk
– Mutual consent for cancellation
– No front end Payment
• No exchange of money at the time of entering forward contract
though either party can insist on initial deposit against price or
delivery to mitigate risk
Forward Contract
• Forward Contracts
– Definition: a contract between two parties for one
party to buy something from the other at a later
date at a price agreed upon today
– Exclusively over-the-counter
• Futures Contracts
– Forward Contract traded in an exchange
1 Sells 1 Buys 1 1 1
2 Buys 1 Sells 1 1 1
3 Sells 1 Buys 1 1 0
Open Interest And Volume
• Ex-2
Open Interest And Volume
• On November 10th
– reliance spot price is 1200 and futures price is 1275
• Because One contract is for 600 shares. Your profit or loss gets multiplied
by 600 times.
Futures Market
Futures( December
Date Spot contract)
December
(Maturity) 1100 1100
Payoff on Futures Contract at
expiration
Payoff of Long futures (if you buy Reliance Forward contract)
=Sell price – Buy price
= Spot price at expiration – forward price
=1100-1050 =50
The initial margin is set at Rs. 10,000 per contract, while the maintenance
margin is Set at Rs. 8000 per contract. The multiple of each contract is 50.
Calculate the mark-to-market cash flows and the daily closing balances in
Accounts of.
A) An investor who has gone long at 4600 on day ‘0’.
B) An investor who has gone short at 4600 on day ‘0’.
C) Calculate the net profit/loss on each of the contracts.
Investor Who has gone long at 4600 (initial margin =10,000 and Maintenance margin = 8,000)