DEFINATION OF FUTURES
DIFFERENCE BETWEEN FORWARD
AND FUTURES
FUTURES MECHANISM IN STOCK
EXCHANGE
GROUP MEMBERS
Pranav Sharma
Swati Chawla
Tabish Nehal
Nipul Agrawal
Shantanu
DEFINATION
A futures contract is an agreement between two
parties to exchange an asset to another at a pre-
agreed future point in time at a pre-agreed price.
CHARACTERSTICS
They can be physical assets like:
Wheat
Cotton
Gold
Cattle
They can be financial assets like:
Currencies
T-bills
Bonds
A futures contract is traded only on a futures
exchange.
Some of them are:
• Chicago Mercantile Exchange (CME)
• London International Financial Futures
Exchange (LIFFE)
• NSE and BSE in India
FURUTES MARKET
Futures are traded on organized future exchanges
either with a designated physical location where
trading takes place or electronic screen based
trading.
These are ready liquid market where futures can
be bought and sold at any time like in a stock
market.
Only members of exchange can trade .
Other people can trade through members of
exchange commonly known as brokers.
These brokers are called Futures Commission
Merchants. (FCM’s).
DIFFERENCE BETWEEN
FORWARD & FUTURES
FORWARD FUTURES
A forward contract is an A futures contract is a
agreement between two standardized contract,
parties to buy or sell an traded on a futures
asset (which can be of any exchange, to buy or sell a
certain underlying
kind) at a pre-agreed instrument at a certain
future point in time. date in the future, at a
specified price.
Customized to customers Standardized. Initial
need. Usually no initial margin payment required.
payment required.
FORWARD FUTURES
Opposite contract with Opposite contract on
same or different the exchange.
counterparty.
Counterparty risk
remains while
terminating with
different counterparty.
High counterparty Low counterparty risk.
risk.
Not regulated. Government regulated
market.
FORWARD FUTURES
The contracting Clearing House.
parties.
Depending on the Standardized.
transaction and the
requirements of the
contracting parties.
Depending on the Standardized.
transaction.
Negotiated directly by Quoted and traded on
the buyer and seller. the Exchange.
FORWARD FUTURES
None. It is very Both parties must
difficult to undo the deposit an initial
operation; profits and guarantee (margin).
losses are cash settled The value of the
at expiry. operation is marked to
market rates with
daily settlement of
profits and losses.
FUTURES EXCHANGE
Trading center with established rules and
regulations, and where buyers and sellers meet
to trade futures contracts in commodities and
financial instruments.
World's major futures exchanges are Chicago
Board Of Trade, Chicago Mercantile Exchange,
Commodity Exchange (New York), Financial
Futures Market (Montreal, Canada) etc.
SPECIFICATION OF
CURRENCY FUTURE
CONTRACT
Underlying
Size of contract
Quotation
Tenor of the contract
Settlement mechanism
Settlement price
Final settlement day
ENTITIES IN TRADING
SYSTEM
Trading Members
Clearing Members
Professional Clearing Members
Participants
MECHANISM
Futures contracts are created when one party
first buys (goes long) a contract from another
party (who goes short).
After expiry, each contract will be settled , either
by physical delivery (typically for commodity
underlying) or by a cash settlement (typically for
financial underlying).
The contracts ultimately are not between the
original buyer and the original seller, but between
the holders at expiry and the exchange.
CLEARING
National Securities Clearing Corporation Limited
(NSCCL) undertakes clearing and settlement of
all trades executed on the Currency Derivatives
Segment of the NSE.
With the help of:
• Clearing members
• Professional Clearing members
• Clearing Banks
SETTLEMENT
Two types of settlements:
• Mark to Market settlement
• Final settlement
Settlement prices for future
EXAMPLE
SCENARIO
An investor believes that an upcoming
decision by the World Trade Organization
concerning trade policy for certain agricultural
commodities will benefit the European Union. A
favorable decision is expected to generate a brief
upswing in the euro against the U.S. dollar. The
value of the euro, while generally declining over
the previous month, has edged up in the past
three days.
STRATEGY
Because the euro/U.S. dollar contracts
are quoted in dollars per regular euro,
the investor establishes a long euro futures
position in early August by buying
3 September euro contracts at a prevailing
rate of 1.0667 dollars per euro. Each
contract represents 100,000 euro. The total
contract value is $320,010.00 (3 x 100,000
x 1.0667).
• RESULT
Three weeks later the World Trade
Organization decision does favor the
European Union and the euro appreciates
against the dollar, reaching a rate of
1.0880 dollars per euro. The investor closes
out his euro position by selling three euro
contracts at 1.0880 (total contract value of
$326,400.00) and realizes a profit of .0213
dollars/euro (total profit = $6,390.00).
THANK YOU
FOR BEARING US.
