FUTURE CONTRACT

CA.CS.CMA.MBA: Naveen. Rohatgi

Numericals in calculation of future price

Q1)The cost of 10gm gold in spot market is ₹ 30,000. The locker rent
for storing gold is ₹ 300 for 3 months and the insurance for the same
is 150. If the prevailing interest rate is 10% p.a. Calculate the fair value
of 3 months future contract.

Q2)If the cost of 10gm gold is the spot market is ₹ 35,000 and locker
rent is ₹ 1,000. For 3 months insurance is ₹ 250 and interest rate is
7%p.a. Calculate fair value for 3 months futures contract on gold.

Q3)Calculate the fair value of shares of ABC Ltd. of 3 months future

contract with the help of following details.
Spot Price = ₹ 250
Interest rate on borrowed funds =9% p.a.
Q4) Shrikant Industries Ltd. Futures trade on National stock
exchange as one, two and three month’s contracts. Money can be
borrowed at 12% per annum.
What will be the price of one unit of new two month futures contract
on Shrikant Industries Ltd, if no dividends are expected during the
two month period, assuming spot price of the Shrikant Industries
Ltd. is ₹ 4,500.

Q5)SBI Futures trade on NSE as one, two and three month’s contract
Money can be borrowed at 16% per annum.
What will be the price of one unit of new two month futures contract
on SBI, if no dividends are expected during the two months period,
assuming spot price of the SBI is ₹ 228.
Margin Account:
As exchange guarantees the settlement of all the trades, to protect
itself against default by either counterparty, it charges various
margins from brokers. Brokers in turn charge margins from their
customers.

Initial Margin :
The amount one needs to deposit in the margin account at the time
of entering a futures contract is known as the initial margin.

Maintenance Margin : Maintenance margin means minimum

balance to margin. If actual margin is below maintenance margin
then trader has to bring back the margin to Initial margin.
MARK TO MARKET :

One of the important features of Futures contracts is that gains and

losses are settled on each trading day. This exercise is called Mark
to Market (MTM) settlement. This means that the value of the
contract is marked to its current market value.

The exchange, with the help of brokers and clearing house, would
collect this MTM margin from the loss bearing party and would
pay the same to the gain eligible (recipient) party.
For example, If an investor buys 1 lot (200 shares) of Futures on
Stock A on 10th September 2019, when the price was Rs 2500, he was
suppose to  give a margin of 15% of the lot value i.e. 15%*200*2500 =
Rs 75,000.

On 11th September, next trading day, the Futures prices closes on Rs

2530, then the investor has made a gain of Rs 6000(Rs 30*200).This
gain would be credited in his account and debited from the account
of the seller on account of mark to market settlement. The position
would start from Rs 2530 from the next day.
Q)
Sensex futures are traded at a multiple of 50. Consider the following
quotations of Sensex futures in the 10 trading days during February.
2009:
Day High Low Closing
4-2-09 3306.4 3290.00 3296.50
5-2-09 3298.00 3262.50 3294.40
6-2-09 3256.20 3227.00 3230.40
7-2-09 3233.00 3201.50 3212.30
10-2-09 3281.50 3256.00 3267.50
11-2-09 3283.50 3260.00 3263.80
12-2-09 3315.00 3286.30 3292.00
14-2-09 3315.00 3257.10 3309.30
17-2-09 3278.0 3249.50 3257.80
18-2-9 3118.00 3091.40 3102.60
Ashok bought one Sensex futures contract on February, 04. The
average daily absolute change in the value of contract is ₹ 10,000 and
standard deviation of these changes is ₹ 2,000. The maintenance
margin s 75%of initial margin.
You are required to determine the daily balances in the margin
account and payment on margin calls, if any.

Solution :

Initial margin = Avg daily absolute change in Value of contract

+ 3 SD

Initial margin= 10,000+ 3*2000= 16000

 Date Closing Profit / Loss Margin Balance
Price

4-2-09 3296.50 16,000

5-2-09 3294.40 (3294.40 – 3296.50) X 50 = (105) 15,895

6/2/09 3230.40 (3230.40 – 3294.40) X 50 =(3200) 12,695

7/2/09 3212.30 (3212.30 – 3230.40) X 50 =(905) 4210 16,000

10/2/09 3267.50 (3267.50 – 3212.30) X 50 = 2760 18,760

11/2/09 3263.80 (3263.80 – 3267.50) X 50 .=(185) 18,575

12//2/09 3292.00 (3292.00 – 3263.80) X 50 =1410 19,985

14/2/09 3309.30 (3309.30 – 3292) X 50 = 865 20,850

17/02/09 3257.80 (3257.80 – 3309.30) X 50 = (2575) 18,275

18/2/09 3102.60 (3102.60 – 3257.80) X 50 =(7760) 5485 16,000