Futures - Backlog of Finance/Stock Market
IMPORTANT:
This time we thought to write on something different & the first thing that came into our mind was “Futures“. The one who can’t relate to it – It’s the chapter that you will be studying in SFM as well it is the most important term in Stock Market & Finance.
FUTURES – BACKLOG OF FINANCE/STOCK MARKET
Objective:
The objective of this Article is to help the students in understanding “ FUTURES “ both from point of view of SFM as well as Stock Market.
The Article will be really Precise as well as simple.
Scope of Article:
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Different segments in Market
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Positions in Market
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I.M.R, MTM & Maintenance Margin
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Fair Future Price
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Arbitrage
So let’s start with the Article –
BASIC TERM:
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Maximum Period – 3 Months
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Maturity Date - Last Thursday of the Month
Segments in Market:
There are two segments in Market:-
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CASH SEGMENT
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DERIVATIVE SEGMENT
Let’s discuss one by one:
CASH SEGMENT:
Contracts which are entered today for either buying or selling as on today. It means if Mr. X enters into a contract to sell 20 shares in the evening, so it will be a case of “CASH SEGMENT “
DERIVATIVES SEGMENT:
Contracts which are entered today for future Buying & Selling. It means if Mr. Y enters into a contract today for buying shares at some future date. It will be a case of “DERIVATIVES”.
POSITIONS IN DERIVATIVE SEGMENT:
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LONG POSITION
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SHORT POSITION
LONG POSITION:
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It means entering today for buying at some future date.
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Long means to buy or to Purchase at some future Date.
SHORT POSITION:
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It means entering today for selling at some future date
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Short means to sell at some future date.
HOW TO SETTLE THE DERIVATIVES?
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The short & simple answer to it will be by taking opposite Position in the Market
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If you have contacted to take Long in future then it will be settled by taking Short in the Marked & Vice Versa
I.M.R, MTM & Maintenance Margin
INITIAL MARGIN REQUIREMNT:
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Before entering into a future Contract, every Contracting Party is required to deposit certain amount which can be treated as “Security Deposit“.
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It is a requirement imposed by SEBI so it needs to be followed anyhow.
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It is calculated on Contacted Value.
MARK TO MARKET MARGIN:
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If the party wants to know the daily balance in his/her account i.e. Profit or Loss in the account we can calculate by preparing M.T.M
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It’s also called Daily Profit or Loss Account.
MAINTENANCE MARGIN:
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It’s a deadline or limit below which our Closing Balance should not Fall
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This Limit is regulated by SEBI (Security Exchange Board of India)
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If our balance falls below the said limit, in this case we need to deposit an additional amount to make it equal to IMR.
FAIR FUTURE PRICE:
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It is the future price of security which can be called as “Optimum“
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Fair means it will be equal to Break Even Point i.e. No Profit No Loss situation
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By point of View of Investors it is called as “ What the amount of security Should be in Future i.e. Fair Price of Security
How to Calculate FFP?
RETURN
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ABSOLUTE AMOUNT PERCENTAGE
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Current Market Price – P.V of Return RATE OF RETURN - %
COST
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ABSOLUTE AMOUNT PERCENTAGE
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Current Market Price + P.V of Cost RATE OF RETURN +%
ARBITRAGE:
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In simple words it means that “ Buy Low Sell High “
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He always takes two Positions in the Market
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He always work for Profit & Never Takes Risk
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He never uses his own money, he always borrows
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He sells what is overvalued & Buy what is undervalued.
HOW TO CALCULATE ARBITRAGE PROFIT?
SITUATION
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VALUE
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FUTURE MARKET
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CASH MARKET
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INVEST/BORROW
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AFP MORE THAN FFP
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OVERVALUED
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SELL
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BUY
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BORROW
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AFP LESS THAN FFP
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UNDERVALUED
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BUY
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SELL
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INVEST
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AFP MORE THAN FFP – (EXPLANATION)
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It means that the Investor thought that the Price of the share after 2 Months (FFP) will be Rs. 100 but actually after 2 Months it turned out to be Rs.120.
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So in this case what we will do is, we will sell the share in the Future Market @ 120, before that we will purchase it in the Cash Market at present @ Rs.100.
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So to purchase the share we need some amount that we will borrow from the Bank @ 10% Interest.
SALE OF SHARE (After 2 Months) – 120 (+)
PAYMENT TO BANK (WITH INTEREST) – 105 (With Interest)
ARBITRAGE PROFIT - Rs.15
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