Future market Derivative Market

1. Future Advance Level

2. Future Price determination
 Future Price = Spot Price * {1+rf*(x/365)-d}
 Rf- Risk free factor ( can be taken as proxy for 91
days treasury bill rate from RBI’s website
 X - number of days to expiry
 D – Dividend
 If future price is trading at a higher price than spot
price then it is termed as Premium in equity and
contang in commodity.

3. Different Kind of Positions in Future
 Cash and carry arbitrage- Cash-and-carry-arbitrage is market neutral strategy
combining the purchase of a long position in an asset such as a stock or
commodity, and the sale (short) of a position in a futures contract on the
underlying asset.
 Calendar Spreads- Taking two position in future one BUY one SELL in two
different contracts
 Naked Spread Position- It means a long or short position in any future contracts
without having any position in the underlying asset

4. Stocks Selection Criteria for F&O
 Stocks chosen among top 500 stocks in terms of avg. daily market capitalization
and avg. daily traded value in the previous six months on a rolling basis
 Median quarter sigma order size over the last six month shall be not less than
Rs. 10 lakh
 Market wide position limit in the stock shall not be less than 300 crores.
 MQSO means the order size (in value terms) required to cause a change in the
stock price equal to one-quarter of a standard deviation.

5. VWAP ( Value Weighted Average Price)
 The volume weighted average price (VWAP) is a trading benchmark used by large
stock market players to buy or sell a stock.
 The theory is that if the price of a buy trade is lower than the VWAP, it is a good
trade. The opposite is true if the price is higher than the VWAP.

6. Implied Volatility
 In option Buy when IV is low sell when IV is Higher
 In general, implied volatility increases when the market is bearish, when investors
believe that the asset's price will decline over time, and decreases when the
market is bullish, when investors believe that the price will rise over time.

7. Types of Risk :-
 Unsystematic Risk
 The stock can decline due to following reasons:-
 Declining revenue
 Declining profit margins
 Higher financing cost
 High leverage
 Management misconduct
 All the above are Unsystematic Risk

8. Types Of Risk :-
 Systematic risk is the risk that is common to all stocks. These are usually the
macroeconomic risks which tend to affect the whole market.
 De-growth in GDP
 Interest rate tightening
 Inflation
 Fiscal deficit
 Geo political risk
 Unsystematic Risk can be managed but Systematic Risk can not be managed.
 Study has revealed that if any investor is holding 20 stocks from different sector
i.e, the maximum extent on can manage Unsystematic Risk.

9. Hedging a single Stock Position
 Long in Spot with same quantity as it is in Future
 Short in Future in one lot
 It will be a neutral position ( No profit No loss )
 For hedging a Portfolio Beta should be calculated
 Hedging with options is done by institutional investors largely

10. BETA (β)

11. Example of Hedging a portfolio :-

12. Calculation :-
 Weighted beta = 1.22*3.8% = 0.046
 Calculate the hedge Value = 1.223 *800,000 = 978440
 Calculate Number of lots = 10100*75 =757500
 Hence no of lots Required = 978440/757500 =1.29
 So either we should short 1 lot or 2 lots

13. Open interest and Volume