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FUTURES
ACKNOWLEDGEMENT
This formal piece of acknowledgement may be sufficient to express the feelings of gratitude
people who have helped me in successfully completing my Final Project Report.
We feel, we shall always remain indebted to without whom it is being impossible to complete
my project report. He gave his kind supervision, guidance, timely support and all other kind
of help required in each and every moment of need.
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S. No.
Table of Contents
Acknowledgment
Table Of Contents
Chapter 1
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Chapter 2: Introduction
2.1 Index Futures
2.2 History of Index Futures
2.3 Uses of Index Futures
2.4 Features and Specifications of Index Futures
Appendix A: References
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Chapter 1
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Chapter 2: Introduction
Index futures are futures contracts with an index instead of a physical asset as its underlying
asset. Indeed, index futures are one of the most important financial futures in the world today
and opened up the way for futures traders to trade and profit from the performance of a
specific index directly instead of having to trade the entire basket of asset covered by the
index.
The most important of index futures are index futures based on broad market indexes such as
the S&P500 Futures and theNikkei225 futures. These stock index futures allow futures
traders to "Buy the market" or "sell the market" for the first time without having to
simultaneously trade the hundreds of stocks that these indexes cover. In a way, trading index
futures is really trading all the stocks or assets covered by an index in the capital weightage
represented in the index. In fact, there are also mini index futures or simply known as "minis"
which allows retail traders to perform leveraged speculation on their underlying index using
very little money.
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Hedging using stock index futures could involve hedging against a portfolio of shares or
equity index options.
Trading using stock index futures could involve, for instance, volatility trading (The
greater the volatility, the greater the likelihood of profit taking usually taking relatively
small but regular profits).
Investing via the use of stock index futures could involve exposure to a market or sector
without having to actually purchase shares directly.
Please note the following cases of equity hedging with index futures:
Where your portfolio 'exactly' reflects the index (this is unlikely). Here, your portfolio is
perfectly hedged via the index future.
Where your portfolio does not entirely reflect the index (this is more likely to be the
case). Here, the degree of correlation between the underlying asset and the hedge is not
high. So, your portfolio is unlikely to be 'fully hedged'.
Equity index futures and index options tend to be in liquid markets for close to delivery
contracts. They trade for cash delivery, usually based on a multiple of the underlying index
on which they are defined (for example 10 per index point).
OTC products are usually for longer maturities, and are usually a form of options product.
For example, the right but not the obligation to cash delivery based on the difference between
the designated strike price, and the value of the designated index at the expiration date. These
are traded in the wholesale market, but are often used as the basis of guaranteed equity
products, which offer retail buyers a participation if the equity index rises over time, but
which provides guaranteed return of capital if the index falls. Sometimes these products can
take the form of exotic options (for example Asian options or Quanto options).
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Indices for futures are the well-established ones, such as S&P 500, FTSE, DAX, CAC40 and
other G12 country indices. Indices for OTC products are broadly similar, but offer more
flexibility.
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Trading Exchange
NSE
Contract Size
Price steps
0.05
Contracts Available
Expiry day
The last Thursday of the expiry month or the previous trading day if the
last Thursday is holiday
Settlement basis
Settlement price
Daily mark to market settlement will consider closing price of the futures
and final settlement will be the closing value of the index
The listing of index futures in a newspaper on a date (Lets say 11-Nov-2009) at NSE is as follows.
The near month is November, mid-month is December, and far month is January. You can
always have 3 contracts in NSE.
November Contracts:
5080
5110
5075
5090
295200
95000
5085
5100
10200
15300
5100
5115
2650
840
December Contracts:
5090
5120
January Contracts:
5105
5135
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brings the margin account to the level of initial margin. In this case, I have to deposit an amount
of 50,850 32,350 = 18,500.
Settlement
At the end when the contract is has to be settled, similar transaction happens and the contract is
closed. Most of the futures end up in cash settlement than delivery as it is more convenient. In
fact, in India, all index and stock futures are cash-settled.
= 10,000 lakh
(assuming the fund is diversified enough, and that a 1% change in the market causes the same
degree of change in the portfolio value)
The fund buys back the index at an appropriate time after 28th Feb.
If the market goes down by 5% as anticipated:
The value of the portfolio stands reduced by 5 crore to 95 crore. The March futures falls from 6600
to 6260 when the fund squares up its position
Gain on futures = (6600-6270)*50*3030 = 499.95 lakh
Therefore, the fund more or less compensates itself for the loss incurred on the portfolio value.
Remember that futures cannot provide permanent protection, and if market sentiments become
Index Futures- Project, RMFD
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bearish, the fund will have to resort to other methods, including rolling over of the hedge. A longer
period of uncertainty can be covered by closing out the position in March futures and opening a new
position by going short on, say, June futures.
If the market goes up by 5% against expectations:
The value of the portfolio stands increased by 5 crore to 105 crore. The price of March futures rises
from 6600 to 6900 when the fund squares up its position.
Loss on futures = (6600-6930)*50*3030 = 499.95 lakh
Therefore, the increase in portfolio value is offset more or less by the loss incurred on the futures
contracts, keeping the value of the portfolio almost constant. Note that hedging through futures
does not mean protecting against loss while preserving gain. It only ensures a constant value of the
portfolio.
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C. You can trade stock index futures electronically as easily as you trade stocks
online.
The E-mini for electronic mini S&P stock index contract was the futures industrys first market
to use a small-order electronic order-routing and execution system. Now, many stock index futures
contracts use an electronic platform to execute trades quickly and easily. In addition, these platforms
often offer trading virtually around the clock.
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H. Transfer risk quickly and efficiently any time during the day or even at night.
Whether you are speculating, looking for insurance protection (hedging), or temporarily
substituting futures for a later cash transaction, most stock index futures trades can be
accomplished quickly and efficiently. Not every stock index futures market has sufficient
liquidity to allow easy entry and exit with minimum slippage, but markets such as S&P 500
futures can handle almost any size order at any time during the trading session. With
electronic trading in contracts such as the E-mini S&P 500, trading sessions are now
stretching almost around the clock. Many mutual funds require investors to wait until the end
of the day to see at what price they were able to purchase or sell shares. With todays
volatility, once-aday pricing may not give you the maneuverability to take positions at exactly
the time you want. Stock index futures give you the opportunity to get into or out of a position
whenever you want and often within seconds of receiving your order. At Lind-Waldock, you
can trade many electronically traded stock index futures contracts directly from your own
computer and know where you stand almost instantaneously.
I. Benefit from transaction costs that are lower than the costs of trading stocks.
One thing to remember when you compare the commission costs of futures trading and stock
trading is that futures trading usually lists commission rates as roundturn, meaning a buy
and a sell. Commission rates for stock trading are normally quoted for only one side of a
transaction for a buy or a sell. So you need to double the quoted cost of a stock trade to
make it comparable to the roundturn cost of a futures trade. Futures trading typically lets you
capitalize on stock market movement for a lower commission rate. For example, if you were
to trade one E-mini S&P 500 futures contract, your stock market exposure to large cap stocks
would be $57,500 ($50 times the S&P 500 Index with the index at 1150.) Say the commission
rate to buy and sell your E-mini S&P 500 Index futures contract is $19 roundturn online. On
the other hand, to trade $57,500 worth of stocks, you might purchase 1,150 shares of a $50
stock. Your stock trading commissions, based on some widely advertise commission rates,
could be around $20 for the buy sid of an online transaction, or $40 roundturn. The cost of
attempting to buy each of the stocks represented in the index would be far higher. As you can
see, stock trading commission fees can be 100% more than futures trading commissions.
Large stock index futures contracts, like the S&P 500 with a $250 multiplier, are even more
commission efficient.
Disadvantages of trading in Index Futures:Futures trading can appear to be a quite attractive investment option. Many investors have made a
fortune with futures trading, including John Henry, the principal owner of the Boston Red Sox
baseball team. However, others have lost large sums of money, enduring the disadvantages of
futures trading. The primary disadvantage is quite evident: The word "futures" says it all. You have
limited or no control over many factors involved in futures investment contracts.
Index Futures- Project, RMFD
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Appendix A: References
1. http://en.wikipedia.org/wiki/Stock_market_index_future
2. http://en.wikipedia.org/wiki/Derivative_(finance)
3. http://en.wikipedia.org/wiki/National_Stock_Exchange_of_India
4. http://www.investopedia.com/terms/i/indexfutures.asp
5. http://www.cmegroup.com/education/files/understanding-stock-index-futures.pdf
6. http://www.businessdictionary.com/definition/stock-index-futures.html
7. http://lastbull.com/nifty-index-futures-understand-with-live-example/
8. http://media.barchart.com/cm/pdfs/lind/LW_10reasons.pdf
9. http://finance.zacks.com/disadvantages-futures-trading-8394.html
10. Book Derivatives and Risk Management by Rajiv Srivastava
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