This document discusses forwards, futures contracts, and margins in derivatives trading. It defines forwards and futures, comparing their key differences. Forwards are private contracts between two parties to buy or sell an asset at a future date, while futures are exchange-traded versions of these contracts that are standardized and require margin. The document also outlines the nature of futures contracts, their advantages and disadvantages, types, pricing, positions, payoffs, and how hedging with futures works. Finally, it describes the different types of margins used in futures trading like initial, special, delivery and daily margins to manage risk.

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2. It is a private contractual agreement
between two parties to buy and sell an
underlying asset at a future date and for a
predetermined price settled or delivered only at
the end of the contract.
FORWARDS
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3. It is the outcome of forward contracts.
It is an exchange traded contract between
two parties to buy and sell an underlying
asset at a future date and for a predetermined
price where the contract could be closed on
or before the contract expiry date. First
introduced in CBOT.
FUTURES
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4. FORWARDS VS FUTURES
1 Private Contract 1 Exchange Traded Contract
2 Customized 2 Standardized
3 Any Delivery date 3 Standard delivery dates
4 Credit risk 4 No credit risk
5 No margin system 5 Margin system
6 Settle at the end of the contract 6 Settled any time
7 Settlement only on delivery dates 7 Continuous settlement
8 Size or Lot of contract is customized 8 Size or lot is standardized
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5. 1. Agreement between two parties to buy and sell a specified commodity
or financial instrument
2. Underlying asset
3. Time bound usually one month and multiples of a month
4. Contract size or lot
5. Settlement date
6. Price quotes
7. Offset / Delivery
NATURE OF A FUTURES CONTRACT
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6. 1. Risk management
2. Low investment – High returns
3. Demat not required
4. No delivery
5. No cost of holding
6. Similar to holding a stock
ADVANTAGES OF FUTURES
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7. 1. Lead to losses due to low investment
2. Influence underlying asset’s price
3. Market volatility
4. Cost of carrying
5. Cannot claim for dividend, voting rights, etc
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ADVANTAGES OF FUTURESDISADVANTAGES OF FUTURES

8. 1. Index
2. Stock
3. Foreign Currency
4. Interest Rate
5. Commodities
6. Energy or Power
TYPES OF FUTURES
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9. • Price fixed by demand and supply conditions
• Price driven by the price of underlying asset
• Price are at par, premium and discount compared to the
underlying asset
• Divergence from spot price
• Convergence to spot price
FUTURES PRICES
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10. 1. Open Position
2. Closed or Zero Position
POSITIONS IN DERIVATIVES
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11. Long Position
• Bought the contract and yet to sell
• Profit = Buying Price – Selling Price
Short Position
• Sold the contract and yet to buy
• Profit = Selling Price – Buying Price
1. OPEN POSITION
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12. Closed by the trader on or before expiry date at
the prevailing market price.
• Sell in case of long position
• Buy in case of short position
Squared off by the market on expiry day at the
closing spot price based on the position.
2. CLOSED OR ZERO POSITION
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13. In both long position and short positions pay
off is as follows
• Profit : If selling price > buying price
• Loss : If selling price < buying price
• Break Even : If selling price = buying price
Prices are net of brokerage, stamp duty, taxes and other costs of trading.
PAY OFF IN FORWARDS AND FUTURES
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14. PAY OFF IN FORWARDS AND FUTURES
Unlimited profit (∞)
Closing Spot Price
Long forward / future Short forward / future
Future Price
Limited Loss (100%)
Future Price
Closing Spot Price
Un Limited Loss (∞)
Limited Profit (100%)

15. HEDGING WITH FUTURES
Long Position Short Position
Buyer – Long position in future
contract.
Seller – Short position in future
contract.
Short position in underlying asset on
1st
Jan, hence receive money on 31st
March.
Long position in underlying asset on 1st
Jan, hence pay money on 31st
March.
Worried about upward price movement
which made you to hedge.
Worried about downward price
movement which made you to hedge.
Your pay-off is zero irrelevant to the
price movement.
Your pay-off is zero irrelevant to the
price movement.
Hence the rising price risk is hedged. Hence the falling price risk is hedged.
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16. It is a tool of risk management by
the exchange assuring clearing and settlement
for both buyers and sellers of futures and
options contracts on different underlying
assets
MARGIN
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17. Types of Margins
1) Initial or Normal or Ordinary margin
2) Special margin
3) Delivery margin
4) Daily margin
MARGIN
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18. It is the margin required whenever a new
trader opens his or her account and would like to trade on
F&0s
1. INITIAL MARGIN
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19. This margin is demanded by the exchange
when the market price rise over a specified percentage by
the exchange
2. SPECIAL MARGIN
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20. Required for delivery of the underlying asset
3. DELIVERY MARGIN
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21. a) Gross Exposure Margin
b) Mark-to-market Margin
c) Volatility Margin
4. DAILY MARGINS
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22. a) Gross Exposure Margin: The net outstanding position
in every security is first computed by taking the
difference of the Buy Value and Sell Value. The total
outstanding gross exposure is then arrived at by
summing up all the security-wise net outstanding
positions in value terms irrespective of whether the
net outstanding position is a net buy or net sell
position across all securities traded
Gross Exposure Margin = Sum | Buy value – Sell value |
4. DAILY MARGINS
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23. b) Mark to market margin: The difference between the close
price and the price at which the trade was executed (trade
price) multiplied by the cumulative buy and sell open position
in each security would give us the Mark to Market Profit/loss
in each security.
MTM Profit/Loss
= [(Total Buy Qty * Close price) – Total Buy Value]
+ [Total Sell Value – (Total Sell Qty * Close price)]
4. DAILY MARGINS
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24. c) Volatility Margin : It is charged on the net outstanding
value of a security as per the applicable volatility margin
percentage for that security.
Volatility margin =
Absolute of [(Buy Value – Sell Value) * Volatility margin percentage]
or
Mod | (Buy Value – Sell Value) * Volatility margin percentage |
4. DAILY MARGINS
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25. Call your stock broker and ask for the following
1) How to open a derivative trading account and what are the requirements?
2) How much margin should you keep with the broker?
3) What are the charges for derivatives trading and how they are different from stock
or equity trading charges?
4) What is the settlement period or cycle. ?
POST SESSION ACTIVITY
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26. QUESTIONS?
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27. THANK YOU
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