The document traces the history and development of futures markets in India from 1875 to present day. Key events include the establishment of commodity exchanges for cotton, oilseeds, and bullion in the late 19th/early 20th centuries. The Forward Contract Regulation Act of 1952 regulated futures trading. Various committees in the 1960s-1990s recommended reintroducing and expanding futures markets. Major steps included allowing stock index futures in 2000 and interest rate futures in 2003. The clearinghouse system and use of initial margins, maintenance margins, and mark-to-market pricing help manage counterparty risk in futures contracts.
This document provides notes on methods of payment in international trade, including payment on open account, payment by bills of exchange, collection arrangements, documentary credits, and bank guarantees. It discusses key concepts like the autonomy principle, where the credit is independent from the underlying sales contract, and the strict compliance doctrine, where banks must strictly adhere to credit terms. Documentary credits are described as the most secure payment method, offering protection to buyers and sellers through the bank system. The types of credits - revocable/irrevocable and confirmed/unconfirmed - are also outlined.
This document discusses key concepts in international trade contracts, including:
1) Contracts are used to manage risks like payment, delivery, and quality issues in international transactions by outlining terms, responsibilities, and risk allocation.
2) Risks in international transactions include payment, delivery, quality, and differences from domestic deals. Trade terms are used to allocate when risks shift between buyers and sellers.
3) Documentary sales involve buyers paying sellers upon presentation of negotiable documents of title, like bills of lading, that evidence ownership and allow legal transfer of goods and documents.
4) Cases like Basse & Selve v. Bank of Australasia establish that banks processing documents have no duty to inspect
This document outlines the Shari'ah standards for Salam contracts according to AAOIFI. Some key points include:
1. Salam contracts allow for the purchase of specified goods for deferred delivery in exchange for immediate payment. Parallel salam contracts, where one party acts as both buyer and seller, are also permitted.
2. The goods being purchased (al-Muslam fihi) must be specified, fungible, commonly available, and delivered on a known date. Currency cannot be the subject of the contract.
3. Multiple salam contracts can be arranged under a master agreement, but the obligations of each contract must remain separate. Penalty clauses for delayed delivery are prohibited.
This document provides a high-level overview of the history of mathematics, levels of mathematics taught at different grades, famous mathematicians, unsolved math problems, and resources for math games and jokes. It discusses important developments like the first evidence of counting 50,000 BC, the definition of the 360 degree circle in 180 BC, the first trigonometry in 140 BC, and the proofs of Fermat's Last Theorem in 1994 and the Four Color Theorem in the 1970s using computers.
The document announces a mathematics project competition open to students in forms 3 and 4 at Maria Regina College Boys' Junior Lyceum. Teams of two students can participate by creating one of the following: a statistics project, charts, or a PowerPoint presentation on a given theme related to mathematics history or concepts. The top five entries will represent the school in the national competition and prizes will be awarded to the top teams nationally. Proposals are due by November 30th and completed projects by January 18th.
This document discusses currency derivatives, including forward contracts, futures contracts, and options contracts. It provides examples of how multinational corporations and speculators use each type of derivative to hedge currency risk or profit from anticipated exchange rate movements. Forward contracts allow firms to lock in future exchange rates. Futures contracts are standardized exchange-traded derivatives. Options provide the right but not obligation to buy or sell a currency at a preset price.
Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. There are key differences between forward and futures contracts, including that futures contracts are standardized and traded on an exchange. Organized futures exchanges help ensure contracts are fulfilled through daily margin payments and marking positions to market price. Futures can be used for hedging to reduce risk or for speculation to profit from price changes. Cash and futures prices are usually closely linked due to arbitrage activities that exploit any price differences.
This document provides notes on methods of payment in international trade, including payment on open account, payment by bills of exchange, collection arrangements, documentary credits, and bank guarantees. It discusses key concepts like the autonomy principle, where the credit is independent from the underlying sales contract, and the strict compliance doctrine, where banks must strictly adhere to credit terms. Documentary credits are described as the most secure payment method, offering protection to buyers and sellers through the bank system. The types of credits - revocable/irrevocable and confirmed/unconfirmed - are also outlined.
This document discusses key concepts in international trade contracts, including:
1) Contracts are used to manage risks like payment, delivery, and quality issues in international transactions by outlining terms, responsibilities, and risk allocation.
2) Risks in international transactions include payment, delivery, quality, and differences from domestic deals. Trade terms are used to allocate when risks shift between buyers and sellers.
3) Documentary sales involve buyers paying sellers upon presentation of negotiable documents of title, like bills of lading, that evidence ownership and allow legal transfer of goods and documents.
4) Cases like Basse & Selve v. Bank of Australasia establish that banks processing documents have no duty to inspect
This document outlines the Shari'ah standards for Salam contracts according to AAOIFI. Some key points include:
1. Salam contracts allow for the purchase of specified goods for deferred delivery in exchange for immediate payment. Parallel salam contracts, where one party acts as both buyer and seller, are also permitted.
2. The goods being purchased (al-Muslam fihi) must be specified, fungible, commonly available, and delivered on a known date. Currency cannot be the subject of the contract.
3. Multiple salam contracts can be arranged under a master agreement, but the obligations of each contract must remain separate. Penalty clauses for delayed delivery are prohibited.
This document provides a high-level overview of the history of mathematics, levels of mathematics taught at different grades, famous mathematicians, unsolved math problems, and resources for math games and jokes. It discusses important developments like the first evidence of counting 50,000 BC, the definition of the 360 degree circle in 180 BC, the first trigonometry in 140 BC, and the proofs of Fermat's Last Theorem in 1994 and the Four Color Theorem in the 1970s using computers.
The document announces a mathematics project competition open to students in forms 3 and 4 at Maria Regina College Boys' Junior Lyceum. Teams of two students can participate by creating one of the following: a statistics project, charts, or a PowerPoint presentation on a given theme related to mathematics history or concepts. The top five entries will represent the school in the national competition and prizes will be awarded to the top teams nationally. Proposals are due by November 30th and completed projects by January 18th.
This document discusses currency derivatives, including forward contracts, futures contracts, and options contracts. It provides examples of how multinational corporations and speculators use each type of derivative to hedge currency risk or profit from anticipated exchange rate movements. Forward contracts allow firms to lock in future exchange rates. Futures contracts are standardized exchange-traded derivatives. Options provide the right but not obligation to buy or sell a currency at a preset price.
Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. There are key differences between forward and futures contracts, including that futures contracts are standardized and traded on an exchange. Organized futures exchanges help ensure contracts are fulfilled through daily margin payments and marking positions to market price. Futures can be used for hedging to reduce risk or for speculation to profit from price changes. Cash and futures prices are usually closely linked due to arbitrage activities that exploit any price differences.
1. Companies invest in other companies for reasons like safety, cash needs, investment returns, influence, and control.
2. Securities are classified as debt, equity, or hybrid and can be held-to-maturity, available-for-sale, or trading.
3. The accounting treatment for securities depends on their classification and includes recognizing interest revenue, dividends, and changes in fair value.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
Here are the key elements of a valid sale contract in Islamic finance:
1. Contract (Aqd): There must be a valid offer and acceptance between the buyer and seller.
2. Subject matter (Mabe'e): The goods or assets being sold must be owned by the seller and defined clearly.
3. Price (Thaman): The price for the goods or assets being exchanged must be defined clearly. It cannot be uncertain or ambiguous.
4. Possession or delivery (Qabza): Possession or delivery of the goods or assets being sold must be transferred from the seller to the buyer. This completes the sale transaction.
So in summary, a valid sale contract requires a mutual agreement between
Derivatives are financial contracts whose value is derived from an underlying asset such as a stock, bond, commodity, currency, or market index. The three main types of derivatives are futures, forwards, and options. Futures and forwards are contracts to buy or sell an asset at a future date, while options provide the right but not obligation to buy or sell an asset. Derivatives allow investors to hedge risk or speculate on changes in the price of the underlying asset. Major derivatives exchanges include the Chicago Board of Trade, Chicago Mercantile Exchange, and the National Stock Exchange of India.
The document discusses the concept of Bay' al-Salam in Islamic finance. It defines Bay' al-Salam as a contract where advance payment is made for goods to be delivered later. It outlines the evidence and conditions for this contract from the Quran, hadith, and scholarly consensus. Specifically, it notes the contract must specify the product, period of delivery, price, place, quality, and quantity to be considered valid. While this concept provides financing benefits, it differs from many modern Islamic bank products that offer deferred payment terms for customers.
- Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. Forward contracts are similar but involve customized terms between known counterparties.
- Futures contracts are traded on organized exchanges where the terms are standardized and the exchange guarantees performance, eliminating default risk. This allows for anonymous trading between buyers and sellers.
- Traders use futures contracts to speculate by taking long or short positions based on their price forecasts, hoping to profit from price movements. Producers and consumers also use futures to hedge and lock-in prices to manage exposure to price risks.
1. Nick Leeson was a rogue trader at Barings Bank who incurred massive losses through unauthorized derivatives trading, bringing down the centuries-old bank.
2. Leeson traded futures and options contracts on the Nikkei 225 stock index and Japanese government bonds without authorization from his position at Barings Futures Singapore.
3. His trading strategy was to bet that the Nikkei index would rise, but it fell significantly instead. This caused huge losses that exceeded $1 billion, more than the total capital of Barings Bank.
Derivatives can be used to manage financial risk. Common derivatives include options, forward contracts, futures contracts, and swaps. Derivatives allow firms to hedge risks like foreign exchange risk, interest rate risk, and commodity price risk. For example, an oil company can use put options to hedge against falling oil prices. Forward contracts lock in future exchange rates. Futures contracts are similar to forwards but are traded on exchanges. Swaps allow exchange of cash flows to modify risk exposure. Derivatives are widely used by large companies to reduce cash flow volatility and financial distress costs through hedging.
This document discusses forwards and futures contracts. It defines forwards as agreements between two parties to buy or sell an asset at a specific price and date without standardized terms or regulation. Futures, on the other hand, are standardized contracts traded on exchanges, with clearinghouses that act as intermediaries and mark positions to market daily. The document provides examples of different derivative types and exchanges, and discusses key differences between forwards and futures regarding standardization, liquidity, counterparty risk, and other factors. It also outlines the roles that hedgers, speculators, and arbitrageurs play in the futures markets.
Contracts for Difference: What is CFD Trading?Peter Anderson
Contracts for difference (CFDs) are agreements between two parties to exchange the difference between the opening and closing price of a contract. There are long and short parties - a long party buys the CFD while a short party sells it. CFDs offer margin flexibility and the ability to go long or short without stamp duty. They can be traded on stocks above certain market capitalizations. The profit or loss from the difference in prices is returned to the parties when closing, plus or minus any interest charged for using margin. Trading rules include only risking money you can afford to lose and using stop losses.
The document provides an overview of futures contracts and derivatives. It defines key terms related to futures like underlying asset, futures price, basis, initial margin, marking to market, etc. It explains the payoffs for long and short futures positions and how futures can be used for hedging, speculation and arbitrage. For hedging, it provides an example of an investor hedging a long stock position using short futures. For speculation, it illustrates how futures provide leverage opportunities. For arbitrage, it describes cash and carry arbitrage to exploit mispricing between spot and futures.
The document discusses various types of financial derivatives, including futures, forwards, options, and swaps. Futures and forwards are contracts that obligate the buyer to purchase an asset at a predetermined price and date in the future. Options provide the right but not the obligation to buy or sell an asset. Swaps involve an agreement between two parties to exchange a series of cash flows over time. Derivatives allow parties to hedge against risk, speculate on price movements, and increase market liquidity.
Derivatives are financial instruments whose value is based on an underlying asset. Common derivatives include futures, forwards, options, and swaps. Futures contracts establish an obligation to buy or sell an asset at a predetermined future date and price. Futures are traded on exchanges and involve daily cash settlement. Market participants use futures to hedge risk from price fluctuations or speculate on price movements.
A futures contract is an agreement to buy or sell an asset at a predetermined price and date in the future. Futures contracts are standardized and traded on an exchange. One party agrees to buy the asset while the other agrees to sell. Key terms include the underlying asset, settlement type, lot size, margins, and mark to market accounting of open positions. Arbitrage involves taking advantage of price differences in related markets to generate riskless profits.
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
Chapters 1 & 2 introduce forwards and futures contracts. Forwards are private obligations negotiated over-the-counter to exchange an asset at a future date at an agreed upon price. Futures are similar to forwards but are exchange-traded with standardized terms and daily cash settlement of profits and losses. Key differences are that futures are exchange-traded, have standardized contracts, and involve daily marking to market rather than final settlement at maturity. Futures exchanges facilitate trading, act as intermediaries requiring margin payments, set contract specifications, and provide liquidity in contracts.
This document discusses various derivative instruments used to manage foreign exchange risk, including options, futures, and swaps. It defines these instruments and provides examples of how they work. Options give the holder the right to buy or sell currency at a preset price on or before expiry. Futures are standardized contracts to exchange currencies at a specified rate. Swaps allow an exchange of interest rate or currency payment obligations between two counterparties. These derivatives help companies and investors hedge and manage their foreign currency risk exposures.
Derivatives are financial instruments whose value is derived from an underlying asset such as commodities, currencies, bonds or stocks. Forwards and futures are types of derivatives that allow parties to lock in prices for assets that will be delivered or settled for in the future. Forwards are private, bilateral contracts while futures are standardized contracts traded on an exchange with clearing houses that act as intermediaries, reducing counterparty risk. Key differences between forwards and futures include their level of standardization, margin requirements, market liquidity and mode of delivery or settlement.
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Tastemy Pandit
Know what your zodiac sign says about your taste in food! Explore how the 12 zodiac signs influence your culinary preferences with insights from MyPandit. Dive into astrology and flavors!
Building Your Employer Brand with Social MediaLuanWise
Presented at The Global HR Summit, 6th June 2024
In this keynote, Luan Wise will provide invaluable insights to elevate your employer brand on social media platforms including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok. You'll learn how compelling content can authentically showcase your company culture, values, and employee experiences to support your talent acquisition and retention objectives. Additionally, you'll understand the power of employee advocacy to amplify reach and engagement – helping to position your organization as an employer of choice in today's competitive talent landscape.
1. Companies invest in other companies for reasons like safety, cash needs, investment returns, influence, and control.
2. Securities are classified as debt, equity, or hybrid and can be held-to-maturity, available-for-sale, or trading.
3. The accounting treatment for securities depends on their classification and includes recognizing interest revenue, dividends, and changes in fair value.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
Here are the key elements of a valid sale contract in Islamic finance:
1. Contract (Aqd): There must be a valid offer and acceptance between the buyer and seller.
2. Subject matter (Mabe'e): The goods or assets being sold must be owned by the seller and defined clearly.
3. Price (Thaman): The price for the goods or assets being exchanged must be defined clearly. It cannot be uncertain or ambiguous.
4. Possession or delivery (Qabza): Possession or delivery of the goods or assets being sold must be transferred from the seller to the buyer. This completes the sale transaction.
So in summary, a valid sale contract requires a mutual agreement between
Derivatives are financial contracts whose value is derived from an underlying asset such as a stock, bond, commodity, currency, or market index. The three main types of derivatives are futures, forwards, and options. Futures and forwards are contracts to buy or sell an asset at a future date, while options provide the right but not obligation to buy or sell an asset. Derivatives allow investors to hedge risk or speculate on changes in the price of the underlying asset. Major derivatives exchanges include the Chicago Board of Trade, Chicago Mercantile Exchange, and the National Stock Exchange of India.
The document discusses the concept of Bay' al-Salam in Islamic finance. It defines Bay' al-Salam as a contract where advance payment is made for goods to be delivered later. It outlines the evidence and conditions for this contract from the Quran, hadith, and scholarly consensus. Specifically, it notes the contract must specify the product, period of delivery, price, place, quality, and quantity to be considered valid. While this concept provides financing benefits, it differs from many modern Islamic bank products that offer deferred payment terms for customers.
- Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. Forward contracts are similar but involve customized terms between known counterparties.
- Futures contracts are traded on organized exchanges where the terms are standardized and the exchange guarantees performance, eliminating default risk. This allows for anonymous trading between buyers and sellers.
- Traders use futures contracts to speculate by taking long or short positions based on their price forecasts, hoping to profit from price movements. Producers and consumers also use futures to hedge and lock-in prices to manage exposure to price risks.
1. Nick Leeson was a rogue trader at Barings Bank who incurred massive losses through unauthorized derivatives trading, bringing down the centuries-old bank.
2. Leeson traded futures and options contracts on the Nikkei 225 stock index and Japanese government bonds without authorization from his position at Barings Futures Singapore.
3. His trading strategy was to bet that the Nikkei index would rise, but it fell significantly instead. This caused huge losses that exceeded $1 billion, more than the total capital of Barings Bank.
Derivatives can be used to manage financial risk. Common derivatives include options, forward contracts, futures contracts, and swaps. Derivatives allow firms to hedge risks like foreign exchange risk, interest rate risk, and commodity price risk. For example, an oil company can use put options to hedge against falling oil prices. Forward contracts lock in future exchange rates. Futures contracts are similar to forwards but are traded on exchanges. Swaps allow exchange of cash flows to modify risk exposure. Derivatives are widely used by large companies to reduce cash flow volatility and financial distress costs through hedging.
This document discusses forwards and futures contracts. It defines forwards as agreements between two parties to buy or sell an asset at a specific price and date without standardized terms or regulation. Futures, on the other hand, are standardized contracts traded on exchanges, with clearinghouses that act as intermediaries and mark positions to market daily. The document provides examples of different derivative types and exchanges, and discusses key differences between forwards and futures regarding standardization, liquidity, counterparty risk, and other factors. It also outlines the roles that hedgers, speculators, and arbitrageurs play in the futures markets.
Contracts for Difference: What is CFD Trading?Peter Anderson
Contracts for difference (CFDs) are agreements between two parties to exchange the difference between the opening and closing price of a contract. There are long and short parties - a long party buys the CFD while a short party sells it. CFDs offer margin flexibility and the ability to go long or short without stamp duty. They can be traded on stocks above certain market capitalizations. The profit or loss from the difference in prices is returned to the parties when closing, plus or minus any interest charged for using margin. Trading rules include only risking money you can afford to lose and using stop losses.
The document provides an overview of futures contracts and derivatives. It defines key terms related to futures like underlying asset, futures price, basis, initial margin, marking to market, etc. It explains the payoffs for long and short futures positions and how futures can be used for hedging, speculation and arbitrage. For hedging, it provides an example of an investor hedging a long stock position using short futures. For speculation, it illustrates how futures provide leverage opportunities. For arbitrage, it describes cash and carry arbitrage to exploit mispricing between spot and futures.
The document discusses various types of financial derivatives, including futures, forwards, options, and swaps. Futures and forwards are contracts that obligate the buyer to purchase an asset at a predetermined price and date in the future. Options provide the right but not the obligation to buy or sell an asset. Swaps involve an agreement between two parties to exchange a series of cash flows over time. Derivatives allow parties to hedge against risk, speculate on price movements, and increase market liquidity.
Derivatives are financial instruments whose value is based on an underlying asset. Common derivatives include futures, forwards, options, and swaps. Futures contracts establish an obligation to buy or sell an asset at a predetermined future date and price. Futures are traded on exchanges and involve daily cash settlement. Market participants use futures to hedge risk from price fluctuations or speculate on price movements.
A futures contract is an agreement to buy or sell an asset at a predetermined price and date in the future. Futures contracts are standardized and traded on an exchange. One party agrees to buy the asset while the other agrees to sell. Key terms include the underlying asset, settlement type, lot size, margins, and mark to market accounting of open positions. Arbitrage involves taking advantage of price differences in related markets to generate riskless profits.
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
Chapters 1 & 2 introduce forwards and futures contracts. Forwards are private obligations negotiated over-the-counter to exchange an asset at a future date at an agreed upon price. Futures are similar to forwards but are exchange-traded with standardized terms and daily cash settlement of profits and losses. Key differences are that futures are exchange-traded, have standardized contracts, and involve daily marking to market rather than final settlement at maturity. Futures exchanges facilitate trading, act as intermediaries requiring margin payments, set contract specifications, and provide liquidity in contracts.
This document discusses various derivative instruments used to manage foreign exchange risk, including options, futures, and swaps. It defines these instruments and provides examples of how they work. Options give the holder the right to buy or sell currency at a preset price on or before expiry. Futures are standardized contracts to exchange currencies at a specified rate. Swaps allow an exchange of interest rate or currency payment obligations between two counterparties. These derivatives help companies and investors hedge and manage their foreign currency risk exposures.
Derivatives are financial instruments whose value is derived from an underlying asset such as commodities, currencies, bonds or stocks. Forwards and futures are types of derivatives that allow parties to lock in prices for assets that will be delivered or settled for in the future. Forwards are private, bilateral contracts while futures are standardized contracts traded on an exchange with clearing houses that act as intermediaries, reducing counterparty risk. Key differences between forwards and futures include their level of standardization, margin requirements, market liquidity and mode of delivery or settlement.
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Tastemy Pandit
Know what your zodiac sign says about your taste in food! Explore how the 12 zodiac signs influence your culinary preferences with insights from MyPandit. Dive into astrology and flavors!
Building Your Employer Brand with Social MediaLuanWise
Presented at The Global HR Summit, 6th June 2024
In this keynote, Luan Wise will provide invaluable insights to elevate your employer brand on social media platforms including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok. You'll learn how compelling content can authentically showcase your company culture, values, and employee experiences to support your talent acquisition and retention objectives. Additionally, you'll understand the power of employee advocacy to amplify reach and engagement – helping to position your organization as an employer of choice in today's competitive talent landscape.
Structural Design Process: Step-by-Step Guide for BuildingsChandresh Chudasama
The structural design process is explained: Follow our step-by-step guide to understand building design intricacies and ensure structural integrity. Learn how to build wonderful buildings with the help of our detailed information. Learn how to create structures with durability and reliability and also gain insights on ways of managing structures.
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3 Simple Steps To Buy Verified Payoneer Account In 2024SEOSMMEARTH
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Company Valuation webinar series - Tuesday, 4 June 2024FelixPerez547899
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At Techbox Square, in Singapore, we're not just creative web designers and developers, we're the driving force behind your brand identity. Contact us today.
HOW TO START UP A COMPANY A STEP-BY-STEP GUIDE.pdf46adnanshahzad
How to Start Up a Company: A Step-by-Step Guide Starting a company is an exciting adventure that combines creativity, strategy, and hard work. It can seem overwhelming at first, but with the right guidance, anyone can transform a great idea into a successful business. Let's dive into how to start up a company, from the initial spark of an idea to securing funding and launching your startup.
Introduction
Have you ever dreamed of turning your innovative idea into a thriving business? Starting a company involves numerous steps and decisions, but don't worry—we're here to help. Whether you're exploring how to start a startup company or wondering how to start up a small business, this guide will walk you through the process, step by step.
Best practices for project execution and deliveryCLIVE MINCHIN
A select set of project management best practices to keep your project on-track, on-cost and aligned to scope. Many firms have don't have the necessary skills, diligence, methods and oversight of their projects; this leads to slippage, higher costs and longer timeframes. Often firms have a history of projects that simply failed to move the needle. These best practices will help your firm avoid these pitfalls but they require fortitude to apply.
2. 2
1875 •Setting up of Bombay Cotton Trade Association Ltd.
1883 •A separate association called “The Bombay Cotton Exchange Ltd.” was
constituted
1900 •Futures trading in oilseeds was started with the setting up of Gujarati
Vyapari Mandali
1926 •Seeds Traders’ Association Ltd was set up in Mumbai
1920 •Futures market in bullion began at Mumbai
1952 •Government passed the Forward Contract Regulation Act, which controls
all transferable forward contracts and futures.
1960/70 •Central govt suspended trading in several commodities like
cotton, jute, edible oilseeds, etc.
1966/1980 •Datwala Committee/ Khusro Committee recommended reintroduction of
commodities
1993 •The Kabra committee recommended futures trading in many
commodities and upgradation of futures market
3. 3
December 14, 1995 •The NSE sought SEBI’s permission to trade index futures.
November 18, 1996 •The LC Gupta Committee set up to draft a policy framework for index futures.
May 11, 1998 •The LC Gupta Committee submitted a report on the policy framework for index
futures.
July 7, 1999 •Reserve Bank of India gave permission for OTC forward rate agreements and
interest rate swaps.
May 25, 2000 •SEBI allowed the NSE and the BSE to trade in index futures.
June 9, 2000 •Trading of the BSE Sensex futures commenced on the BSE.
June 12, 2000 •Trading of Nifty futures commenced on the NSE.
September 25, 2000 •Nifty futures trading commenced
July, 2001 •Trading on equity futures commenced at NSE on 31 securities
June, 2003 •Trading on interest rate futures commenced at NSE
5. 5
Interest rate • Treasury bills, notes, bonds, debentures,
futures euro-dollar deposits etc.
Foreign • USD, Pound Sterling, Yen, etc.
currencies futures
Stock index • Based on indices of stocks
futures
Bond index • Indices of bond prices
futures
Cost of living • Aka inflation futures; CPI, WPI, etc.
index futures
6. 6
Forward contracts were useful, but only up to a point. They didn’t
eliminate the risk of default among the parties involved in the trade.
For example, merchants might default on the forward agreements if they
found the same product cheaper elsewhere, leaving farmers with the
goods and no buyers.
Conversely, farmers could also default if prices went up dramatically
before the forward contract delivery date, and they could sell to someone
else at a much higher price.
Therefore, a standardized contract was required to address this issue.
12. 12
A legally binding, standardized agreement to buy or sell a
standardized commodity, specifying quantity and quality at a
set price on a future date.
A great advantage of standardized contracts was that they were
easy to trade.
As a result, the contracts usually changed hands many times
before their specified delivery dates.
Many people who never intended to make or take delivery of a
commodity began to actively engage in buying and selling
futures contracts.
13. 13
Why? They were ―speculating‖ — taking a
chance that as market conditions changed
they would be able to buy or sell the
contracts at a profit.
The ability to eliminate a ―position‖ on a
contract by buying or selling it before the
delivery date — called ―offsetting‖ — is a
key feature of futures trading.
18. 18
Delivery or cash settlement
• Most commodity futures contracts are written for completion of the futures
contract through the physical delivery of a particular good.
• Most financial futures contracts allow completion through cash settlement. In
cash settlement, traders make payments at the expiration of the contract to
settle any gains or losses, instead of making physical delivery.
Offset or reversing trade
• If you previously sold a futures contract, you can close out your position by
purchasing an identical futures contract. The exchange will cancel out your
two positions.
Exchange-for-physicals (EFP) or ex-pit transaction
• Two traders agree to a simultaneous exchange of a cash commodity and
futures contracts based on that cash commodity.
19. 19
Suppose today the price of the futures is $3.95 and next
day, the buyer finds that people are paying $4.15 per
bushel for wheat. If B believes that the price of wheat
will not go any higher, then B might sell a wheat
futures contract for $4.15 to someone else.
In this situation, B has made a reversing trade.
20. 20
Day Price of wheat Event Amount Equity in account
If maintenance margin were not required
1 4 Deposit initial margin 1000 1000
2 4.10 Mark to market 500 1500
3 3.95 Mark to market -750 750
4 4.15 Mark to market 1000 1750
With required maintenance margin
1 4 Deposit initial margin 1000 1000
2 4.10 Mark to market 500 1500
Buyer withdraws cash -500 1000
3 3.95 Mark to market -750 250
Buyer deposits cash 750 1000
4 4.15 Mark to market 1000 2000
Reversing trade and withdrawal of cash -2000 0
21. 21
Since B is involved in two wheat contracts, one as a
seller and one as a buyer, B is obligated to deliver
5000 bushels to clearing house and clearing house
in turn is required to deliver it back to B.
The moment B offsets his positions, clearing house
will immediately cancel both of them, and B will be
able to withdraw $2000 from his account.
22. 22
An Exchange-for-Physicals Transaction
Before the EFP
Trader A Trader B
Long 1 wheat futures Short 1 wheat futures
Wants to acquire actual wheat Owns wheat and wishes to sell
EFP Transaction
Trader A Trader B
Agrees with Trader B to purchase Agrees with Trader A to sell wheat and
wheat and cancel futures cancel futures
Receives wheat; pays Trader B Delivers wheat; receives payment from
Trader A
Reports EFP to exchange; exchange a- Reports EFP to exchange; exchange
djusts books to show that Trader A is adjusts books to show that Trader B is
out of the market out of the market
24. 24
The procedures that protect clearinghouse
from potential losses due to non-
compliance of the buyer or seller are:
• Impose initial margin requirements on both
buyers and sellers
• Mark to market the accounts of buyers and
sellers every day
• Impose daily maintenance margin
requirements on both buyers and sellers.
25. 25
A performance bond is a deposit to cover losses you may
incur on a futures contract as it is marked-to-market.
A maintenance performance bond is a minimum amount
of money (a lesser amount than the initial performance bond)
that must be maintained on deposit in your account.
A performance bond call is a demand for an additional
deposit to bring your account up to the initial performance
bond level.
26. 26
In stock trading, margin refers to a partial
deposit you put up with your broker to
purchase securities, while borrowing the
remaining amount (typically half) from the
broker (expecting to pay interest).
In futures, this ―down payment‖ is actually a
good faith deposit you pay to indicate that
you will be able to ensure fulfillment of the
contract.
27. 27
Futures contracts require an initial performance bond in
an amount determined by the exchange itself.
This amount is roughly 5% to 15% of the total purchase price
of the futures contract. This margin covers only a part of the
protection against the total loss in the case of default.
Therefore, the use of marking to market coupled with a
maintenance margin requirement provides the requisite
amount of additional protection.
28. 28
At the end of the trading day your position is marked-to-the-
market. That is, the clearing house will settle your account on a
cash basis.
Money will be added to your performance bond balance if your
position has made a profit that day.
If you’ve sustained a loss that day, money is deducted from your
performance bond account.
This rebalancing occurs each day after the close of trading.
29. 29
If your position has lost money and the
balance in the performance bond account
has fallen below the maintenance level, a
performance bond call will be issued.
That means you have to put in more money
to bring the account up to the initial
performance bond level.
32. 32
How Trading Affects Open Interest
Time Action Open Interest
t=0 Trading opens for the popular widget contract. 0
t=1 Trader A buys and Trader B sells 1 widget contract. 1
t=2 Trader C buys and Trader D sells 3 widget contracts. 4
t=3 Trader A sells and Trader D buys 1 widget contract. 3
(Trader A has offset 1 contract and is out of the mar-
ket. Trader D has offset 1 contract and is now short
2 contracts.)
t=4 Trader C sells and Trader E buys 1 widget contract. 3
Ending Trader Long Position Short Position
Posi- B 1
tions C 2
D 2
E 1
All Traders 3 3
36. 36
Table 3.2
Gold Prices and the Basis
(July 11)
Contract Prices The Basis
CASH 353.70
JUL (this year) 354.10 -.40
AUG 355.60 -1.90
OCT 359.80 -6.10
DEC 364.20 -10.50
FEB (next year) 368.70 -15.00
APR 373.00 -19.30
JUN 377.50 -23.80
AUG 381.90 -28.20
OCT 386.70 -33.00
DEC 391.50 -37.80
40. 40
Basis = current spot price – corresponding future price
• Future price here is the purchase price stated in the futures contract.
• Spot price is the price of a good for immediate delivery.
• Open interest is the number of futures contracts for which delivery is currently obligated.
Repo Rate
• The repo rate is the finance charges faced by traders. The repo rate is the interest rate on
repurchase agreements.
• ―Repo‖ is the name commonly used to refer to a repurchase agreement. Under a repurchase
agreement, one party to the transaction, referred to as the repo side, borrows money by posting
government securities as collateral. The counterparty, referred to as the reverse repo side,
lends money secured by the collateral. The reverse repo party has use of the collateral for the
term of the repo while the repo party retains claim to any coupon payments or price
appreciation. (Ref. Randall Dodd Director, Financial Policy Forum, March 20, 2006)
A Repurchase Agreement
• An agreement where a person sells securities at one point in time with the understanding that
he/she will repurchase the security at a certain price at a later time.
41. 41
An Arbitrageur attempts to exploit any discrepancies in price between the futures
and cash markets.
An academic arbitrage is a risk-free transaction consisting of purchasing an asset
at one price and simultaneously selling it that same asset at a higher price,
generating a profit on the difference.
Example: riskless arbitrage scenario for INFOSYS stock trading on the NSE and
BSE.
Assumptions:
• Perfect futures market
• No taxes
• No transactions costs
• Commodity can be sold short
44. 44
Since the futures or forwards
don’t require front-end from
either the long or short
transaction; therefore, the
contract’s initial market
value is usually zero.
45. 45
There are three main
theories of future pricing
• The expectations hypothesis
• Normal backwardation
• A full carrying charge market
46. 46
Hypothesis: The futures price for a commodity is
what the marketplace expects the cash price to be
when the delivery month arrives.
The expectation hypothesis is a good predictor
because it provides an important source of
information about what the future price is likely
to be. It works like a price discovery mechanism.
50. 50
Normally, the futures price exceeds the spot
price; this market is called contango.
If the futures price is less than the spot price,
this is called backwardation, or an
inverted market.
As the gap between the futures price and spot
narrows, we say that the basis is strengthened.
51. A hedger (for example, a farmer) who is selling a futures contract is
trying to lock in the price of the commodity in future. i.e. the hedger is
trying to reduce the risk, but this risk has to be borne by somebody i.e.
speculators.
Now question is if the future price equals the spot price + storage costs +
other costs exactly, what the speculator will earn by bearing the risk?
Therefore, the speculator will agree to that future price where he expects
that the spot price on the delivery date will be higher than futures price.
This is called normal backwardation.
53. 53
A full carrying charge market occurs when
futures prices reflect the cost of storing and
financing (borrowing) the commodity until
the delivery month.
In the world of certainty, the futures price
is equal to the current spot price plus the
carrying charges until the delivery month.
54. 54
To the extent that markets adhere to the following equations
markets are said to be at ―full carry‖:
F 0, t S 0(1 C 0, t )
F 0, d F 0, n(1 Cn, d )
If the futures price is higher than that specified by above
equations, the market is said to be above full carry.
If the futures price is below that specified by the above
equations, the market is said to be below full carry.
55. 55
To determine if a market is at full carry, consider the
following example:
Suppose that:
September Gold $410.20
December Gold $417.90
Bankers Rate 7.8%
56. 56
Step 1: compute the annualized percentage
difference between two futures contracts.
12
AD (F )
F
0, d
0. N
M 1
Where
• AD = Annualized percentage difference
• M = Number of months between the maturity of the
futures contracts.
57. 57
12
$417.90 3
AD ( )
$410.20
1
AD 0.0772
Step 2: compare the annualized difference to the
interest rate in the market.
The gold market is almost always at full carry. Other
markets can diverge substantially from full carry.
58. 58
A spread is the difference in price between two futures contracts
on the same commodity for two different maturity dates:
Spread F 0, t k F 0, t
F0,t = The current futures price for delivery of the product at time t.
• This might be the price of a futures contract on wheat for delivery in 3 months.
F0,t+k = The current futures price for delivery of the product at time
t +k.
• This might be the price of a futures contract for wheat for delivery in 6 months.
Spread relationships are important to speculators.
59. We know that there is a relationship between the price of the
commodity in the cash market and price of that commodity in the
futures market. 59
The futures market price should reflect the storage cost of
that commodity unto that future date plus the cash price of that
commodity today and any other costs.
If futures price is more than this price (= cash price + storage cost
+ other costs) then there is a possibility of arbitrage.
One will purchase the commodity today, store it and at the same
time short a futures contract to deliver it on the futures date.
Since there is a difference in prices, there is a scope for arbitrage.
60. 60
The common way to value a futures contract is by using
the Cost-of-Carry Model. The Cost-of-Carry Model says
that the futures price should depend upon two things:
• The current spot price.
• The cost of carrying or storing the underlying good from now until
the futures contract matures.
Assumptions:
• There are no transaction costs or margin requirements.
• There are no restrictions on short selling.
• Investors can borrow and lend at the same rate of interest.
61. Suppose you buy the corn now for the current cash price of S0 per bushel
61
and store it until you have to deliver it at date T, the forward price you
would be willing to commit would have to be high enough to cover
• The present cost of the corn and
• The cost of storing the corn until contract maturity
These storage costs involve
• Commission paid to the warehouse for storing
• Cost of financing the initial purchase
• LESS cash flows received by owing the asset.
F0,T = S0 + SC0,T
= S0 + (PC0, T + i 0, T – D0, T)
64. 64
The Cost-of-Carry Model can be expressed as:
F 0, t S 0(1 C 0, t )
S0 = the current spot price
F0,t = the current futures price for delivery of
the product at time t.
C0,t = the percentage cost required to store (or carry) the
commodity from today until time t.
The cost of carrying or storing includes:
• Storage costs
• Insurance costs
• Transportation costs
• Financing costs
67. 67
A cash-and-carry arbitrage occurs when a trader borrows
money, buys the goods today for cash and carries the goods
to the expiration of the futures contract. Then, delivers the
commodity against a futures contract and pays off the loan.
Any profit from this strategy would be an arbitrage profit.
0 1
1. Borrow money 4. Deliver the commodity
2. Sell futures contract against the futures contract
3. Buy commodity 5. Recover money & payoff
loan
68. 68
The futures price must be greater than or
equal to the spot price of the commodity
plus the carrying charges necessary to carry
the spot commodity forward to delivery.
F 0, t S 0(1 C 0, t )
0 1
1. Borrow $400 4. Deliver gold against
2. Buy 1 oz gold futures contract
3. Sell futures contract 5. Repay loan
69. 69
Cash-and-Carry Gold Arbitrage Transactions
Prices for the Analysis:
Spot price of gold $400
Future price of gold (for delivery in one year) $450
Interest rate 10%
Transaction Cash Flow
t=0 Borrow $400 for one year at 10%. +$400
Buy 1 ounce of gold in the spot market for $400. - 400
Sell a futures contract for $450 for delivery of 0
one ounce in one year.
Total Cash Flow $0
t=1 Remove the gold from storage. $0
Deliver the ounce of gold against the futures +450
contract.
Repay loan, including interest. -440
Total Cash Flow
+$10
71. 71
A reverse cash-and-carry arbitrage occurs when a trader sells short a
physical asset. The trader purchases a futures contract, which will be
used to honor the short sale commitment. Then the trader lends the
proceeds at an established rate of interest. In the future, the trader
accepts delivery against the futures contract and uses the commodity
received to cover the short position. Any profit from this strategy would
be an arbitrage profit.
0 1
1. Sell short the commodity 4. Accept delivery from futures
2. Lend money received contract
from short sale 5. Use commodity received
3. Buy futures contract to cover the short sale
72. 72
The futures price must be equal to or less
than the spot price of the commodity plus
the carrying charges necessary to carry
the spot commodity forward to delivery.
0 F 0, t S 0(1 C 0, t ) 1
1. Sell short 1 oz. gold 4. Collect proceeds
2. Lend $420 at 10% from loan
interest 5. Accept delivery on
3. Buy a futures contract futures contract
6. Use gold from futures
contract to repay the
short sale
73. 73
Reverse Cash-and-Carry Gold Arbitrage Transactions
Prices for the Analysis
Spot price of gold $420
Future price of gold (for delivery in one year) $450
Interest rate 10%
Transaction Cash Flow
t=0 Sell 1 ounce of gold short. +$420
Lend the $420 for one year at 10%. - 420
Buy 1 ounce of gold futures for delivery in 1 0
year.
Total Cash Flow $0
t=1 Collect proceeds from the loan ($420 x 1.1). +$462
Accept delivery on the futures contract. -450
Use gold from futures delivery to repay short 0
sale.
Total Cash Flow +$12
75. 75
Transactions for Arbitrage Strategies
Market Cash-and-Carry Reverse Cash-and-Carry
Debt Borrow funds Lend short sale proceeds
Physical Buy asset and store; deliver Sell asset short; secure
against futures proceeds from short sale
Futures Sell futures Buy futures; accept delivery;
return physical asset to honor
short sale commitment
76. Since the futures price must be76 either greater than or equal to
the spot price plus the cost of carrying the commodity
forward by rule #1.
And the futures price must be less than or equal to the spot
price plus the cost of carrying the commodity forward by rule
#2.
The only way that these two rules can reconciled so there is
no arbitrage opportunity is by the cost of carry rule #3.
Rule #3: the futures price must be equal to the spot price plus
the cost of carrying the commodity forward to the delivery
date of the futures contract.
F 0, t S 0(1 C 0, t )
77. 77
If prices were not to conform to cost of
carry rule #3, a cash-and carry arbitrage
profit could be earned.
Recall that we have assumed away
transaction costs, margin requirements,
and restrictions against short selling.
78. 78
As we have just seen, there must be a relationship between the futures price
and the spot price on the same commodity.
Similarly, there must be a relationship between the futures prices on the same
commodity with differing times to maturity.
The following rules address these relationships:
Cost-of-Carry Rule 4
Cost-of-Carry Rule 5
Cost-of-Carry Rule 6
79. The distant futures price must be greater than or equal to the nearby futures price plus
79
the cost of carrying the commodity from the nearby delivery date to the distant
delivery date.
F 0, d F 0, n(1 Cn, d )
F0,d = the futures price at t=0 for the distant delivery contract maturing at t=d.
Fo,n = the futures price at t=0 for the nearby delivery contract maturing at t=n.
Cn,d = the percentage cost of carrying the good from t=n to t=d.
If prices were not to conform to cost of carry rule # 4, a cash-and-carry arbitrage profit
could be earned.
80. 80
0 1 2
7. Remove gold
1. Buy futures 4. Borrow $400 from storage
contract w/exp 5. Take delivery on 1 8. Deliver gold
in 1 yrs. yr to exp futures against 2 yr.
2. Sell futures contract. futures contract
contract w/exp 6. Place the gold in 9. Pay back loan
in 2 years storage for one yr.
3. Contract to
borrow $400
from yr 1-2
81. 81
0 1 2
7. Remove gold
1. Buy futures 4. Borrow $400 from storage
contract w/exp 5. Take delivery on 1 8. Deliver gold
in 1 yrs. yr to exp futures against 2 yr.
2. Sell futures contract. futures contract
contract w/exp 6. Place the gold in 9. Pay back loan
in 2 years storage for one yr.
3. Contract to
borrow $400
from yr 1-2
82. 82
Gold Forward Cash-and-Carry Arbitrage
Prices for the Analysis
Futures price for gold expiring in 1 year $400
Futures price for gold expiring in 2 years $450
Interest rate (to cover from year 1 to year 2) 10%
Transaction Cash Flow
t=0 Buy the futures expiring in 1 year. +$0
Sell the futures expiring in 2 years. 0
Contract to borrow $400 at 10% for year 1 to 0
year 2.
Total Cash Flow $0
t=1 Borrow $400 for 1 year at 10% as contracted at +$400
t = 0.
Take delivery on the futures contract. - 400
Begin to store gold for one year. 0
Total Cash Flow $0
t=2 Deliver gold to honor futures contract. +$450
Repay loan ($400 x 1.1) - 440
Total Cash Flow + $10
83. 83
The nearby futures price plus the cost of carrying the commodity from
the nearby delivery date to the distant delivery date cannot exceed the
distant futures price.
Or alternatively, the distant futures price must be less than or equal to
the nearby futures price plus the cost of carrying the commodity from the
nearby futures date to the distant futures date.
F0,d F0,n 1 Cn,d
If prices were not to conform to cost of carry rule # 5, a reverse cash-
and-carry arbitrage profit could be earned.
84. 84
0 1 2
1. Sell futures 7. Accept delivery
contract w/exp 4. Borrow 1 oz. gold on exp 2 yr
in 1 yrs. 5. Deliver gold on 1 futures contract
2. Buy futures yr to exp futures 8. Repay 1 oz.
contract w/exp contract. borrowed gold.
in 2 years 6. Invest proceeds 9. Collect $400
3. Contract to from delivery for loan
lend $400 one yr.
from yr 1-2
85. 85
Gold Forward Reverse Cash-and-Carry Arbitrage
Prices for the Analysis:
Futures price for gold expiring in 1 year $440
Futures price for gold expiring in 2 years $450
Interest rate (to cover from year 1 to year 2) 10%
Transaction Cash Flow
t=0 Sell the futures expiring in one year. +$0
Buy the futures expiring in two years. 0
Contract to lend $440 at 10% from year 1 to 0
year 2.
Total Cash Flow $0
t=1 Borrow 1 ounce of gold for one year. $0
Deliver gold against the expiring futures. + 440
Invest proceeds from delivery for one year. - 440
Total Cash Flow $0
t=2 Accept delivery on expiring futures. - $450
Repay 1 ounce of borrowed gold. 0
Collect on loan of $440 made at t = 1. + 484
Total Cash Flow + $34
86. 86
Since the distant futures price must be either greater than or equal
to the nearby futures price plus the cost of carrying the
commodity from the nearby delivery date to the distant delivery
date by rule #4.
And the nearby futures price plus the cost of carrying the
commodity from the nearby delivery date to the distant delivery
date can not exceed the distant futures price by rule #5.
The only way that rules 4 and 5 can be reconciled so there is no
arbitrage opportunity is by cost of carry rule #6.
87. 87
The distant futures price must equal the nearby futures price plus the
cost of carrying the commodity from the nearby to the distant delivery
date.
F 0, d F 0, n(1 Cn, d )
If prices were not to conform to cost of carry rule #6, a cash-and-carry
arbitrage profit or reverse cash-and-carry arbitrage profit could be
earned.
Recall that we have assumed away transaction costs, margin
requirements, and restrictions against short selling.
88. 88
Ease of Short Selling
• To the extent that it is easy to short sell a commodity, the market will
become closer to full carry.
• Difficulties in short selling will move a market away from full carry.
• Selling short of physical goods like wheat is more difficult, while
selling short of financial assets like Eurodollars is much easier. For
this reason, markets for financial assets tend to be closer to full carry
than markets for physical assets.
Large Supply
• If the supply of an asset is large relative to its consumption, the
market will tend to be closer to full carry. If the supply of an asset is
low relative to its consumption, the market will tend to be further
away from full carry.
89. 89
Non-Seasonal Production
• To the extent that production of a crop is seasonal, temporary imbalances between
supply and demand can occur. In this case, prices can vary widely.
• Example: in North America, wheat harvest occurs between May and September.
Non-Seasonal Consumption
• To the extent that consumption of commodity is seasonal, temporary imbalances
between supply and demand can occur.
• Example: propane gas during winter Turkeys during thanksgiving
High Storability
• A market moves closer to full carry if its underline commodity can be stored easily.
• The Cost-of-Carry Model is not likely to apply to commodities that have poor
storage characteristics.
• Example: eggs
92. 92
Cash market Futures market
May 10 Anticipate the sale of 20, 000 Sell four contracts, 5000 ounces
ounces in two months and each July futures contract at
receive Rs.1052 per ounce Rs.1068 per ounce
July 5 Cash price of silver is Rs.1071 Buy four contracts at Rs.1087
per ounce; mfg sales 20, 000
ounces at that rate
Results Profit of Rs. 19 per ounce However, he loses Rs.19 per ounce
when he buys the futures contract.
93. 93
Cash market Futures market
May 10 If he had sold today: 1052 x Sell : 4x5000x1068 = 2,13,60,000
20,000 = 2,10,40,000
July 5 1071 x 20, 000 = 2,14,20,000 Buy: 4x5000x 1087 = 2,17,40,000
Results Profit of Rs. 3, 80, 000 He loses Rs.3, 80, 000 in the futures
contract.
96. 96
Suppose on June 1, Ms. Deepa realizes she needs to purchase
110,000 pieces of wood planks on September 1.
Today’s cash price for wood planks is $300 per 1000 board feet
($300/MBF). She observes that September Lumber futures are
currently trading at $305/MBF.
She also knows that historically the futures price in September
tends to be about $5/MBF higher than the cash price. So Deepa
figures that by buying a September Lumber futures contract in
June at $305, she is locking in a price of about $300.
97. 97
Cash market Futures market
June 1 Needs to buy wood planks in Buys (goes long) one September
September for $300/MBF Lumber futures contract at
to make desired profit. $305/MBF.
Sep 1 Cash price rises to $315/MBF. Deepa sells her September
Deepa buys lumber for Lumber contract at $320/MBF.
$315/MBF.
Results Deepa pays $15/MBF more However, she gains $15/MBF when
for lumber than she wanted she sells the futures contract.
to.
98. 98
Cash market Futures market
June 1 $300/MBF X 110 = $33,000 $305/MBF X 110 = $33,550
Sep 1 $315/MBF X 110 = $34,650 $320/MBF X 110 = $35,200
Results Higher cost in cash market: Net profit in futures market:
Spent $1,650 more Gained $1,650
99. 99
The difference between the cash price and the
futures price is called basis.
The basis changes during the life of the futures
contract.
It tends to narrow as contract maturity approaches.
That is, the futures price moves closer to the cash
price during the delivery month.
100. 100
At any date t, the basis is the spot price minus the
forward price for a contract maturing at date T,
• Bt,T = St – Ft,T (spot price of the asset to be hedged – futures price of contract used)
Initial basis at date 0 (B0,T) will always be known
since both the current spot and forward contract
prices can be observed.
Consider an investor who hedges her long position in
a commodity by taking a short position in a forward
contract(delivering the commodity at maturity).
101. At date 1, B1= S1 – F1
101
At date 2, B2 = S2 – F2
For the hedger who takes a short position in futures at
time 1, the price realized for the asset is S2 and the
profit on the futures position is (F1 – F2)
Therefore the effective price is = S2 + (F1 – F2) = F1 +
(S2 – F2) = F1 + B2
102. 102
Suppose, an investor wishes in March to hedge a long position of
100, 000 pounds of cotton she is planning to sell in June.
However, each futures contract is requiring only 50, 000 pounds
of cotton. Therefore, she decides to short two of the July contracts
(intending to liquidate her position before the maturity)
Suppose, in the beginning, the spot cotton price was $0.4834 per
pound and the July futures contract was $0.5305 per pound.
Calculate initial basis. B1= S1 – F1= 0.4834 – 0.5305 = - 0.0471
104. Suppose, cotton prices have declined so that cash price in June are
104
$0.4660 and futures are trading at $0.4753.
Calculate basis for June. B2 = S2 – F2 = 0.4660 – 0.4753 = -
0.0093
Basis has increased in value or strengthened, which is to the short
hedger’s advantage.
Now, she sells cotton in cash market for $0.4660
At the same time she also sells the futures for its contract value i.e.
$0.5305 whereas the market future price is $0.4753; it means that
she has made a profit of (0.5305 – 0..4753) = $0.0552