Background - Forwards Market - Varsity by Zerodha

10/8/2018 Background - Forwards Market – Varsity by Zerodha
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Module 4 — Futures Trading
Chapter 1
Background – Forwards Market

92
1.1 – Overview
The Futures market is an integral part of the Financial Derivatives world. ‘Derivatives’ as they are called is a security, whose value is derived from another
financial entity referred to as an ‘Underlying Asset’. The underlying asset can be anything a stock, bond, commodity or currency. The financial derivatives have
been around for a long time now. The earliest reference to the application of derivatives in India dates back to 320 BC in ‘Kautilya’s Arthashastra’. It is believed
https://zerodha.com/varsity/chapter/background-forwards-market/ 1/30
that in the ancient Arthashastra (study of Economics) script, Kautilya described the pricing mechanism of the standing crops ready to be harvested at some point
in the future. Apparently he used this method to pay the farmers much in advance, thereby structuring a true ‘forwards contract’.
Given the similarities between the forwards and the futures market, I think the best possible way to introduce the futures market is by first understanding the
‘Forwards market’. The Understanding of Forwards Market would lay a strong foundation for learning the Futures Market.
The forwards contract is the simplest form of derivative. Consider the forwards contract as the older avatar of the futures contract. Both the futures and the
forward contracts share a common transactional structure, except that over the years the futures contracts have become the default choice of a trader. The
forward contracts are still in use, but are limited to a few participants such as the industries and banks. The focus of this chapter is to help you understand the
structure of a typical forwards transaction, after which we will break it down to its elements, and understand its advantages and disadvantages.
1.2 – A simple Forwards example

The Forward market was primarily started to protect the interest of the farmers from adverse price movements. In a forward market, the buyer and seller enter
into an agreement to exchange the goods for cash. The exchange happens at a specific price on a specific future date. The price of the goods is fixed by both the
parties on the day they enter into the agreement. Similarly the date and time of the goods to be delivered is also fixed. The agreement happens face to face with
no intervention of a third party. This is called “Over the Counter or OTC” agreement. Forward contracts are traded only in the OTC (Over the Counter) market,
where individuals/ institutions trade through negotiations on a one to one basis.
Consider this example, there are two parties involved here.
One is a jeweler whose job is to design and manufacture jewelry. Let us call him ‘ABC Jewelers’. The other is a gold importer whose job is to sell gold at a
whole sale price to jewelers, let us call him’ XYZ Gold Dealers’.
On 9th Dec 2014, ABC enters into an agreement with XYZ to buy 15 kilograms of gold at a certain purity (say 999 purity) in three months time (9th March
2015). They fix the price of Gold at the current market price, which is Rs.2450/- per gram or Rs.24,50,000/- per kilogram. Hence as per this agreement, on 9th
March 2015, ABC is expected to pay XYZ a sum of Rs.3.675 Crs (24,50,000/Kg*15) in return for the 15 kgs of Gold.
This is a very straightforward and typical business agreement that is prevalent in the market. An agreement of this sort is called a ‘Forwards Contract’ or a
‘Forwards Agreement’.
Do note, the agreement is executed on 9th Dec 2014, hence irrespective of the price of gold 3 months later i.e 9th March 2015, both ABC and XYZ are obligated
to honor the agreement. Before we proceed further, let us understand the thought process of each party and understand what compelled them to enter into this
agreement.
Why do think ABC entered into this agreement? Well, ABC believes the price of gold would go up over the next 3 months, hence they would want to lock in
today’s market price for the gold. Clearly, ABC wants to insulate itself form an adverse increase in gold prices.
In a forwards contract, the party agreeing to buy the asset at some point in the future is called the “Buyer of the Forwards Contract”, in this case it is ABC
Jewelers.
Likewise, XYZ believes the price of gold would go down over the next 3 months and hence they want to cash in on the high price of gold which is available in
the market today. In a forwards contract, the party agreeing to sell the asset at some point in the future is called the “Seller of the Forwards Contract”, in this
case it is XYZ Gold Dealers.
Both the parties have an opposing view on gold; hence they see this agreement to be in line with their future expectation.
1.3 – 3 possible scenarios

While both these parties have their own view on gold, there are only three possible scenarios that could pan out at the end of 3 months. Let us understand these
scenarios and how it could impact both the parties.
Scenario 1 – The price of Gold goes higher
Assume on 9th March 2015, the price of gold (999 purity) is trading at Rs.2700/- per gram. Clearly, ABC Jeweler’s view on the gold price has come true. At the
time of the agreement the deal was valued at Rs 3.67 Crs but now with the increase in Gold prices, the deal is valued at Rs.4.05 Crs. As per the agreement, ABC
Jewelers is entitled to buy Gold (999 purity) from XYZ Gold Dealers at a price they had previously agreed upon i.e Rs.2450/- per gram.
The increase in Gold price impacts both the parties in the following way –
Party Action Financial Impact

ABC Jewelers Buys gold from XYZ Gold Dealers @ Rs.2450/- per gram ABC saves Rs.38 Lakhs ( 4.05 Crs – 3.67 Crs) by virtue of this agreement
XYZ Gold Dealers Obligated to sell Gold to ABC @ Rs.2450/- per gram Incurs a financial loss of Rs.38 Lakhs.
Hence, XYZ Gold Dealers will have to buy Gold from the open market at Rs.2700/- per gram and would have to sell it to ABC Jewelers at the rate of Rs.2450/-
per gram thereby facing a loss in this transaction.
Scenario 2 – The price of Gold goes down
Assume on 9th March 2015, the price of gold (999 purity) is trading at Rs.2050/- per gram. Under such circumstances, XYZ Gold Dealers view on the gold
price has come true. At the time of the agreement the deal was valued at Rs 3.67 Cr but now with the decrease in gold prices, the deal is valued at Rs.3.075 Cr.
However, according to the agreement, ABC Jewelers is obligated to buy Gold (999 purity) from XYZ Gold Dealers at a price they had previously agreed upon
i.e Rs.2450/- per gram.
This decrease in the gold price would impact both the parties in the following way –
Party Action Financial Impact

Is obligated to buy gold from XYZ Gold Dealers @ Rs.2450/- per ABC loses Rs.59.5 Lakhs ( 3.67 Crs – 3.075 Crs) by virtue of this
ABC Jewelers
gram agreement
XYZ Gold
Entitled to sell Gold to ABC @ Rs.2450/- per gram XYZ enjoys a profit of Rs.59.5 Lakhs.
Dealers
Do note, even though Gold is available at a much cheaper rate in the open market, ABC Jewelers is forced to buy gold at a higher rate from XYZ Gold Dealers
hence incurring a loss.
Scenario 3 – The price of Gold stays the same
If on 9th March 2015, the price is the same as on 9th Dec 2014 then neither ABC nor XYZ would benefit from the agreement.
1.4 – 3 possible scenarios in one graph

Here is a visual representation of the impact of gold prices on ABC Jewelers –
As you can see from the chart above, at Rs.2450/- per gram, there is no financial impact for ABC. However, as per the graph above we can notice that ABC’s
financials are significantly impacted by a directional movement in the gold prices. Higher the price of gold (above Rs.2450/-), higher is ABC’s savings or the
potential profit. Likewise, as and when the gold price lowers (below Rs.2450/-), ABC is obligated to buy gold at a higher rate from XYZ, thereby incurring a
loss.
Similar observations can be made with XYZ –
At Rs.2450/- per gram, there is no financial impact on XYZ. However as per the graph above, XYZ’s financials are significantly impacted by a directional
movement in the gold prices. As and when the price of gold increases (above Rs.2450/-), XYZ is forced to sell gold at a lower rate, thereby incurring a loss.
However, as and when the price of gold decreases (below Rs.2450/-) XYZ would enjoy the benefit of selling gold at a higher rate, at a time when gold is
available at a lower rate in the market thereby making a profit.
1.5– A quick note on settlement

Assume that on 9th March 2015, the price of Gold is Rs.2700/- per gram. Clearly as we have just understood, at Rs.2700/- per gram ABC Jewelers stands to
benefit from the agreement. At the time of the agreement (9th Dec 2014) 15 Kgs gold was worth Rs. 3.67Crs, however as on 9th March 2015 15 kgs Gold is
valued at Rs.4.05 Crs. Assuming at the end of 3 months i.e 9th March 2015, both the parties honor the contract, here are two options available to them for
settling the agreement –
1. Physical Settlement – – The full purchase price is paid by the buyer of a forward contract and the actual asset is delivered by the seller. XYZ buys 15
Kgs of gold from the open market by paying Rs.4.05Crs and would deliver the same to ABC on the receipt of Rs.3.67 Crs. This is called physical
settlement
2. Cash Settlement – In a cash settlement there is no actual delivery or receipt of a security. In cash settlement, the buyer and the seller will simply
exchange the cash difference. As per the agreement, XYZ is obligated to sell Gold at Rs.2450/- per gram to ABC. In other words, ABC pays Rs.3.67 Crs
in return for the 15 Kgs of Gold which is worth Rs.4.05Cr in the open market. However, instead of making this transaction i.e ABC paying Rs.3.67 Crs in
return for the gold worth Rs.4.05Crs, the two parties can agree to exchange only the cash differential. In this case it would be Rs.4.05 Crs – Rs.3.67 Crs
= Rs.38 Lakhs. Hence XYZ would just pay Rs.38 lakhs to ABC and settle the deal. This is called a cash settlement
We will understand a lot more about settlement at a much later stage, but at this stage you need to be aware that there are basically two basic types of settlement
options available in a Forwards Contract – physical and cash.
1.6 – What about the risk?

While we are clear about the structure (terms and conditions) of the agreement and the impact of the price variation on either party, what about the risk
involved? Do note, the risk is not just with price movements, there are other major drawbacks in a forward contract and they are–
1. Liquidity Risk – In our example we have conveniently assumed that, ABC with a certain view on gold finds a party XYZ who has an exact opposite
view. Hence they easily strike a deal. In the real world, this is not so easy. In a real life situation, the parties would approach an investment bank and
discuss their intention. The investment bank would scout the market to find a party who has an opposite view. Of course, the investment bank does this for
a fee.
2. Default Risk/ / Counter party risk – Consider this, assume the gold prices have reached Rs.2700/- at the end of 3 months. ABC would feel proud about
the financial decision they had taken 3 months ago. They are expecting XYZ to pay up. But what if XYZ defaults?
3. Regulatory Risk – The Forwards contract agreement is executed by a mutual consent of the parties involved and there is no regulatory authority
governing the agreement. In the absence of a regulatory authority, a sense of lawlessness creeps in, which in turn increases the incentive to default
4. Rigidity – Both ABC and XZY entered into this agreement on 9th Dec 2014 with a certain view on gold. However what would happen if their view would
strongly change when they are half way through the agreement? The rigidity of the forward agreement is such that, they cannot foreclose the agreement
half way through.
The forward contracts have a few disadvantages and hence future contracts were designed to reduce the risks of the forward agreements.
In India, the Futures Market is a part of a highly vibrant Financial Derivatives Market. During the course of this module we will learn more about the Futures
and methods to efficiently trade this instrument!
So, let’s hit the road!
Key takeaways from this chapter

1. The forwards contract lays down the basic foundation for a futures contract
2. A Forward is an OTC derivative, which is not traded on an exchange
3. Forward contracts are private agreements whose terms vary from one contract to the other
4. The structure of a forwards contract is fairly simple
5. In a forward agreement, the party agreeing to buy the asset is called the “Buyer of the Forwards Contract”
6. In a forward agreement the party agreeing to sell the asset is called the “Seller of the Forwards Contract”
7. A variation in the price would have an impact on both the buyer and the seller of the forwards contract
8. Settlement takes place in two ways in a forward contract – Physical and Cash settlement
9. The risk of a forward contract is reduced by a futures contract
10. The core of a forward and futures contract is the same.
Module 4
Chapters
1. Background – Forwards Market

2. Introducing Futures Contract
3. The Futures Trade
4. Leverage & Payoff
5. Margin & M2M
6. Margin Calculator (Part 1)
7. Margin Calculator (Part 2)
8. All about Shorting
9. The Nifty Futures
10. The Futures Pricing
11. Hedging with Futures
12. Open Interest
92 comments
1. amit pathak says:

February 22, 2015 at 7:00 am
Karthik,
I want to understand how short covering in nifty futures makes underlying nifty index move.How it happens?whether arbitrage has a role to play in it.
¶Reply
Karthik Rangappa says:

Short covering is a term to express the fact that the traders with short position are closing their open positions. When they close their open positions
they simply need to buy back the futures. This means there would be a surge to buy back shares, which would lead to a short rally in the market. As
far as i can imagine, short covering has nothing to do with arbitrage.
¶Reply
SIVA9 says:
April 2, 2015 at 6:10 am
Hi Karthik,
Short Covering:
People are expecting market may fall

Futures – short shares of ABC – Intention go down (opened the position)
Buy shares of ABC – Intention go up (so closed the position to make the profit)
People are expecting short/small rally may come to upside for some time, but the main trend is down.
Please correct if I am wrong about the short covering.
Thanks,
Siva.
¶Reply

April 3, 2015 at 6:39 am
True, short covering is when there is fear of increase in prices hence short sellers cover their positions in a panic to save themselves
from booking a loss….by virtue of which the prices starts to increase. This is because when short sellers cover their positions, the need
to buy back shares.
¶Reply
Sudhir soni says:

March 13, 2018 at 8:46 pm
Hello sir
Can you tell me that I m trading in mcx and yesterday my unrealised profit was -4400, now is this amount deducted from my total account
value or not for the next day trading starts, my all trades are normal to mis.
¶Reply

March 14, 2018 at 7:43 am
Yes, commodities are futures for which mark to market is applicable and the money will be deducted from your trading account.
¶Reply
2. Vijay V says:
March 16, 2015 at 1:32 am
Thank you for explaining things very well with examples!!!
¶Reply

March 16, 2015 at 4:41 am
Most welcome!
¶Reply
3. ishwar thawrani says:

June 5, 2015 at 3:33 am
sir
why there is no pdf available after module 2 .please provide us
¶Reply

June 5, 2015 at 6:43 am
We are working on converting the content to e-book format. It takes a lot of time, request you to please bear with us in the meanwhile. Thanks.
¶Reply
4. ishwar thawrani says:

June 6, 2015 at 2:15 am
not a problem sir , thanks for that this site is very useful for us
¶Reply

June 8, 2015 at 1:02 pm
¶Reply
5. Sunil Tyagi says:

October 1, 2015 at 8:40 am
There is an annoying share prompt on the screen that refuses to go even if one shares the page.
Kindly remove as it is preventing smooth reading especially on mobile devices.
¶Reply

Got rid of it, thanks for pointing it Sunil.
¶Reply
6. Dheeraj Gupta says:

Hi Karthik,
Thanks for explaining the thing in very plain English with example. I am interested in commodity market but there is no course associated with
commodity and mentioned that “coming soon”. When it is expected to launch the commodity course.
¶Reply

Dheeeraj – right now the focus is on Options, once options is done we will start with Commodities.
¶Reply
7. Sahil Kwatra says:

October 19, 2016 at 12:35 pm
Hi Karthik,
I just want to trade in Nifty Options. Do I need to read up on all the modules or can I skip a few?
Thanks,
Sahil
¶Reply

October 19, 2016 at 5:23 pm
Well, its always good to read up. However, if you are not up for it…then at least read the Options module before you start Options trading.
¶Reply
8. Vijaya Sai says:

January 8, 2017 at 4:37 pm
Explain roll over
¶Reply

January 9, 2017 at 11:00 am
Section 6.2 – http://zerodha.com/varsity/chapter/margin-calculator-part-1/
¶Reply
9. Chandan Gupta says:

January 15, 2017 at 4:03 pm
Please make it available in hindi.
¶Reply

January 16, 2017 at 11:12 am
Few modules are already available in Hindi. Request you to check.
¶Reply
10. abhishek says:

March 8, 2017 at 10:09 am
lets say i but a lot of nifty50 fut to hold it for a few days. Day 1 i put the stop loss order. now if the SL is not hit, will this order be valid the next day or i
will have to place a different order??
¶Reply

March 8, 2017 at 12:17 pm
No, you will have to place a fresh order the next day.
¶Reply
11. lakshmisha says:

March 10, 2017 at 10:26 am
nice brokerage. study material are awsome . i will open a/c in zerodha . it is abest borkerage company
¶Reply

March 10, 2017 at 2:20 pm
Thanks, we will look forward to you joining us.
¶Reply
12. kulpeet says:

May 14, 2017 at 10:37 am
Can we convert MIS to NRML in futures!
¶Reply

May 15, 2017 at 1:30 am
Yes, you can.
¶Reply
13. kulpeet says:

May 14, 2017 at 10:38 am
In NRML,does BO and CO applicabe or not!
¶Reply

May 15, 2017 at 1:31 am
Yup.
¶Reply
14. narendra prachand says:

July 12, 2017 at 6:04 pm
NIFTY MOVES NIFTY FUTURES OR NIFTY FUTURES MOVE NIFTY?
¶Reply

July 13, 2017 at 10:55 am
Nifty spot moves Nifty futures.
¶Reply
15. Chandan says:

August 1, 2017 at 10:17 pm
Hi tell me about in future trading when we quit on fix contract date or any time pl tell about trading period.
¶Reply

August 3, 2017 at 1:29 pm
You can square off the position anytime you wish.
¶Reply
16. Maha says:

August 29, 2017 at 11:55 pm
Hi Karthick,
The writeup is amazing.I am going through all the modules to have more idea and to have solid knowledge
I have a question:
In cash settlement, whether ABC will buy actual gold from open market instead of XYZ ? The difference amount will be paid by XYZ to ABC which is a
profit for ABC in this case ?
¶Reply

August 30, 2017 at 10:47 am
Yes, in cash settlement only the difference is paid, in cash.
¶Reply
17. Jones says:

September 7, 2017 at 6:03 pm
Hi,
I Buy XYZ futures @rs.100 on day 1 and sell it on day 10 at 12pm @rs.120.So my profit is Rs.20 per share.And when i sell it some one has to buy from
me.So after he buy at 12pm price starts to shoot to Rs.122 and he hold it for the day without selling and continue as NRML.In this case did i lose any
money apart from Profit???
¶Reply

No, you make your profit of 20.
¶Reply
18. Divjot Singh Gulati says:

Hello sir,
SEBI is to likely to increase the trading time upto 5 pm or 730 pm.
What is your honest view on this?
And sometime later, to curb the retail participation in derivatives market, they would consider increasing the lot size or only allowing HNI to deal in
derivatives market.
Your candid view on this also -)
Thank you
¶Reply

If this happens (increase in trading time), then this is good for scalpers. I personally think increasing lot size is also a good move, as it would curb
excess speculation and encourage investments.
¶Reply
19. Ravi Kumar BA says:

Hi Karthik,
Few questions
1. Can you short Futures and carry it for more than 1 day i.e Short Delivery of Futures?
2. I don’t find Nifty Pharma F&O neither on NSE or on Zerodha Margin Calculator … However, there is a NiftyPharma a Index, but is there a F&O
which you can trade?
¶Reply

September 15, 2017 at 10:36 am
1) Yes
2) Besides Nifty and Bank Nifty, no other futures are really liquid.
¶Reply
Ravi Kumar BA says:

Thanks Karthik.
Assume i have squared off my Futures contract for profit.

1. When will the Profits available for me to withdraw (T, T+1 ..)?
2. When will the Margins be unblocked for me to Withdraw (T, T+1…)?
¶Reply

1) You can place a withdrawal request the same day

2) The moment you close the position
¶Reply
20. abhishek kumar sah says:

1) lets say i hold 1 contract of SBI fut. Now next day sbi give dividend of say 10 rs per share. so the stock price will fall at the opening. But i hold a
futures contract. what will happen in that case?
2) Also in case of stock split say 1:1 the price will half, does that mean i will now have 2 contract(i had 1 initially).
3) what if the ratio is not 1:1. say 3:1 now as the futures has a fixed lot what will happen in that case?
¶Reply
1) The futures price will be adjusted to the drop. You will not make any additional profits becuase of the dividend
2) Yes
3) Odd lots will be cash settled.
¶Reply
21. harshl says:

November 23, 2017 at 12:50 am
sir you can any providee the learning chapter in only equity maegin hpw to use and buy and sell share using margin please any provide
not so please give me a example
¶Reply

November 23, 2017 at 11:58 am
Check chapters 5 to 7 – https://zerodha.com/varsity/module/futures-trading/
¶Reply

December 5, 2017 at 9:58 am
I live in odisha and there is a cyclone. So no mobile connection no net connection. I hold a futures contract and i need to place a stop loss every
morning(as long as i hold the contract). What would you do in that circumstance? Or any measures we can take before hand to deal with such problems?
¶Reply

Abhishek, I hope you are safe.
As far as the futures position is concerned, the request to place the order has to come from you, either via the terminal or by you calling our support
center and confirming your ZPIN. There are no other options.
¶Reply

Lets say i want to place a buy order(Normal) at RS 100. And once the order is executed i want to place a stop loss at Rs95. Now the problem i face is once
i have place the order i have to wait for it to go through and then only i can place the stop loss.
So is there any way i can place both the order and once the buy is executed automatically stop loss will be placed?
¶Reply

Have you learned about the Bracket and cover order? Check this – https://www.youtube.com/watch?v=2TrYyOHA7P4&list=PLkxTRam6E2V-
okv6gwQlt6dLTsn0v6CD1&index=8 and this – https://www.youtube.com/watch?v=v4Buda7v-dY&list=PLkxTRam6E2V-
okv6gwQlt6dLTsn0v6CD1&index=9
¶Reply
abhishek kumar sah says:

yes i know bracket and cover order. But those are for MIS. Is there something for the delivery trades?
¶Reply

No, not available for delivery trades.
¶Reply
24. Umesh Jagtap says:

December 7, 2017 at 8:57 pm
Can you provide a detailed process(with pictures) for placing Futures order on Kite including calculations of Margin in layman’s term?
¶Reply

I’d suggest you attend the daily demo we conduct, happens twice a day, keep track of it here –
https://www.youtube.com/user/zerodhaonline/featured
¶Reply
25. Krishna Deshmukh says:

January 25, 2018 at 12:18 pm
in liquidity risk , the investment bank has to be paid a fee to find a party and make a deal happen. what is the risk involved here? didn’t get that part.
¶Reply

January 25, 2018 at 12:33 pm
What in case you cant find a counterparty? In this case, you are holding to a position and exposed to the directional risk.
¶Reply
26. Ishan Choubey says:

February 4, 2018 at 4:43 pm
Hi karthik,
I have two ques. for you related to this chapter,
1.) Why both the parties pick a date 3 months in future, When they can settle the deal now, If ABC thinks the price will go up so they fix the deal at CMP
and XYS thinks the prices will go down so he also try to fix the deal at CMP, if they are both ready the settle the deal at CMP then whats the point in
waiting for 3 months when they can settle rite now because of opposing views, they are waiting just to see that how much one profited or lost from the
deal.
2.) Suppose the gold dealers XYZ is not buying the gold at the end of contract, he some how already had 15kgs of gold which he purchased sometime
back at 2300000/kg, so if he decides to sell the gold at 2400000 CMP he is already getting 100000/kg profit, So how will the cash settlement will take
place in this particular case.
¶Reply

1) Because these are forward dated contracts, view materialize at a later point. For example, you want to travel to USA in May, you’d ideally want $
in May, right? Not really in Feb? Likewise.
2) Possible, end of the day, the difference has to be made good. By the way, this is the reason why futures were introduced – to standardize the
structure of the transaction between buyers and sellers.
¶Reply
27. Neeraj Nirbhavane says:

Hi Karthik ,
1. Can i short Niftyfutures and carry it forward with a progressive/trailing stoploss for more than 1day to max till expiry of the month ?
2. what about shorting stocks or stockfuture?
¶Reply

1) Yes, of course, you can

2) If you short stocks, then the same has to be squared off the same day. However, you can carry over the stock futures until expiry.
¶Reply
Neeraj Nirbhavane says:

suppose if a stock is trading at 200, and the results are weak and indicators are showing down trend , i expect 150-160 levels in a time period
of week or or two, buying put option will be better than shorting stock regularly on mis?
And what if the stock is not traded in F&O?
¶Reply

March 1, 2018 at 11:50 am
Yes, because MIS is an intraday order whereas you can carry forward the PUT options overnight. In case the stock is not in F&O, then
I’m afraid you have no option but to short the stock and cover it by EOD.
¶Reply
Neeraj Nirbhavane says:

March 1, 2018 at 2:40 pm
Thank you Karthik , all doubts cleared.
¶
March 2, 2018 at 11:27 am
Good luck, Neeraj.
¶
28. chidambaram says:
March 17, 2018 at 7:02 pm
Hi Sir,
In case we hold a future contract of a stock and say its in a profit of 5rs a share,but then in middle if the stock dividend payout(Rs.8 /share) ex-date is
reached and so the stock value is adjusted then,
1.Will the future price will also reduce?
2.If future price will reduced to Rs.8,then won’t that lead us to a loss of Rs.3/share !!.
3.If it would lead us to a loss because of adjustment,then it means that no one will hold stock futures on the dividend ex-date?or will everyone short the
stock future the previous day?
¶Reply

March 18, 2018 at 1:02 pm
The contracts are all pre-adjusted to corporate actions. So, the effect is already known and reflects in the contract.
¶Reply
chidambaram says:
March 19, 2018 at 10:00 pm
1.Means,will it lead us to a loss in this dividend payout situation if we hold the contract during exdate?
2.Had there been any situation , that in Spot market the stock price increase, but in future market very less people to buy so that future price
decreases?If So in that case what to be done?
¶Reply

March 20, 2018 at 10:44 am
1) No – the futures contracts are not affected by corporate actions

2) Nope, since futures always mimics spot
¶Reply
29. trader says:

March 31, 2018 at 5:26 pm
Hi Karthik,
Recently there was news that sebi is considering to impose tighter restrictions on retail traders who do fno trading wherein their total exposure in fno
positions wil be limited to some amount as determined by their income tax filing. Brokers are already protesting this move.. do you think such a decision
will be implemented? Becoz at the end of the day it is the retail trader who wud not be able to grow his account becoz he cannot add his gains from
previous trades as there wil be an upper cap and hence no compounding will be possible..
¶Reply

April 2, 2018 at 11:43 am
I personally think its a bad idea. Take a look at this – https://tradingqna.com/t/derivative-exposure-based-on-income-tax-returns-for-retail-traders-

outcome-from-latest-sebi-board-meeting/36279
¶Reply
30. Prem Kumar Jindal says:

July 3, 2018 at 6:50 pm
This is a beautiful, simple, effective delivery of the subject matter. All chapters are excellent. The question and answers
also removes lot of doubts.
Congratulations to the entire team.
¶Reply

July 4, 2018 at 10:40 am
Thanks for the kind words, Prem!

Good luck and happy learning!
¶Reply
31. trader says:

July 21, 2018 at 10:17 pm
Hi Karthick,
with respect to the new rule by sebi under which it will put a limit to the exposure which retail traders can have in the derivatives market, will this rule
apply even to the HNI (high net worth) traders as well?
¶Reply

July 22, 2018 at 10:24 am
I’m not sure if there is any new rule like this. The most recent from SEBI is on physical settlement, check this – https://zerodha.com/z-
connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
¶Reply
trader says:
July 22, 2018 at 11:34 am
I meant about the proposed rule which sebi plans to put in place wherein retail traders derivatives exposure will be decided by their income
tax returns..will this apply to HNI traders as well?
¶Reply

July 23, 2018 at 11:01 am
Well, its hard to speculate on what SEBI will come out eventually. But I guess if you can prove to have enough net worth, then it
should not be a problem to continue trading F&O I guess.
¶Reply
32. Sneha Chakraborty says:

Hello .
Very lucid and easy to understand even for beginners.
I would like to request you though to use easier number (preferably round figures) while explaining hypothetical scenarios. For example : When we are
trying to understand forward contracts between ABC and xyz for gold 2450*10*15 -4.06 crore etc , is very distracting. Kindly use simpler numbers
especially for someone like me who is weak in Maths. Great explanations though.
¶Reply

Glad you liked the content, Sneha. Appreciate the feedback.
¶Reply
33. Mohd Farook says:

Hlo sir I am new user of zerodha I want to gained knowledge for future trade so can u help regarding this
Pls reply contact me 8369003036
¶Reply

I’d suggest you read through this module completely, Farook.
¶Reply
34. Junty says:

Hi,
I have been trying to understand derivatives trade, and have read about the reasons why many prefer this to the spot segment; but one thing I still don’t get
is, how a public listed company benefits from the derivatives trade, since they themselves can not trade in them. Can any company refuse to have its
derivatives traded in the f&o market?
¶Reply

The company does not really benefit from getting listed under F&O nor can they refuse this. This is basically dependent on the trading pattern,
based on which the exchange takes a call.
¶Reply
35. ricky says:

Can i use borrowed money for trading without any certification if mutually agreed by lender.
¶Reply

This depends on the terms of the agreement with your lender. Some clearly state that you should not be trading with the funds borrowed.
¶Reply
ricky says:
lets take a real example my friend is ready to give me loan for certain fixed monthly interest for trading in markets. My concern is that will
regulators would have any problem if i trade by using that money. For example consider loan amount to be 10 lakh and 2 percent that is
20000 monthly interest.
¶Reply

No Ricky, nobody will have a problem with this. As far as the regulator is concerned, the funds are coming in from a registered bank
account. However, on a personal note – I’d suggest you don’t do this. I’ve seen many do this only to end up in a bad state at a later
point.
¶Reply
ricky says:
Thank You for your valuable personal advise.Even personally i would not lend anyone money for trading.
¶
Yup, I’ve seen this is happening over and over again.
Good luck!
¶
36. ayush wadhwani says:
hello sir from where i can gain complete information about intraday?
¶Reply

There is a lot of content available here, Ayush. I’d suggest you get started on Varsity.
¶Reply
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Modules
1. Introduction to Stock Markets
14 chapters
2. Technical Analysis
20 chapters
3. Fundamental Analysis
16 chapters
4. Futures Trading
12 chapters
5. Options Theory for Professional Trading
23 chapters
6. Option Strategies
13 chapters
7. Markets and Taxation
7 chapters
8. Currency & Commodity Futures
19 chapters
9. Risk Management & Trading Psychology
16 chapters
10. Trading Systems
15 chapters

Background - Forwards Market - Varsity by Zerodha

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10/8/2018 Background - Forwards Market – Varsity by Zerodha

Module 4 — Futures Trading

Background – Forwards Market

1.2 – A simple Forwards example

Consider this example, there are two parties involved here.

1.3 – 3 possible scenarios

Scenario 1 – The price of Gold goes higher

Party Action Financial Impact

Scenario 2 – The price of Gold goes down

Party Action Financial Impact

Scenario 3 – The price of Gold stays the same

1.4 – 3 possible scenarios in one graph

Similar observations can be made with XYZ –

1.5– A quick note on settlement

1.6 – What about the risk?

So, let’s hit the road!

Key takeaways from this chapter

1. Background – Forwards Market

1. amit pathak says:

Karthik Rangappa says:

People are expecting market may fall

Please correct if I am wrong about the short covering.

Karthik Rangappa says:

Sudhir soni says:

Karthik Rangappa says:

Thank you for explaining things very well with examples!!!

Karthik Rangappa says:

3. ishwar thawrani says:

Karthik Rangappa says:

4. ishwar thawrani says:

Karthik Rangappa says:

5. Sunil Tyagi says:

Karthik Rangappa says:

Got rid of it, thanks for pointing it Sunil.

6. Dheeraj Gupta says:

Karthik Rangappa says:

7. Sahil Kwatra says:

Karthik Rangappa says:

8. Vijaya Sai says:

Explain roll over

Karthik Rangappa says:

Section 6.2 – http://zerodha.com/varsity/chapter/margin-calculator-part-1/

9. Chandan Gupta says:

Please make it available in hindi.

Karthik Rangappa says:

Few modules are already available in Hindi. Request you to check.

10. abhishek says:

Karthik Rangappa says:

11. lakshmisha says:

Karthik Rangappa says:

Thanks, we will look forward to you joining us.

12. kulpeet says:

Can we convert MIS to NRML in futures!

Karthik Rangappa says:

Yes, you can.

13. kulpeet says:

In NRML,does BO and CO applicabe or not!

Karthik Rangappa says:

May 15, 2017 at 1:31 am

14. narendra prachand says:

NIFTY MOVES NIFTY FUTURES OR NIFTY FUTURES MOVE NIFTY?

Karthik Rangappa says:

Nifty spot moves Nifty futures.