Understanding Futures and Options In the share market and commodities market, along with shares and commodities cash trading, trading is also carried in futures and options. These are also known as derivatives. Many persons knows that in future market you have to purchase and sell in lot and you have to deposit only the margin money. But doesn’t know what is an actually future and options are. Futures Futures is a contract between two persons to sell or purchase a described item (share or commodity) and described quantity at a future date. When you are buying a future of Tata Chemicals, it means that you are contracting with seller to buy the no. of shares in lot of Tata chemicals at a future date. In Indian share market, the …show more content…
100 and earned a profit of (Market price – rs. 100 – Rs. 2) . If price is less than Rs. 100 then Mahesh will not exercise the option and don’t purchase the share and will be in a loss of Rs. 2 per share. However as previously stated the settlement is done in cash only. Therefore if market price is Rs. 110 then the seller has to give Rs. 5000 to Mahesh. Also note that it is not compulsory to carry forward the contract by a person up to the settlement date and can buy or sell before settlement date to clear his position. Related Concepts In cash market you can sell only what you have. If you don’t have shares of a company then you can not sell it. (Although you can sell first but you have to cover up it in same day). But in future and options you can sell them first. After selling you can buy them later to clear position or it will settle on the settlement date. So if you believe that the price of a share/commodity will fall you can make money from the price decrease also. In share market, the number of shares is fixed for a company. For example a company issues 1 crore shares, so the number of shares remains 1 crore only other than in a case when the company issues more shares or buy back shares. But in futures and options there is contract for shares or commodity, no real shares or commodity is involved. When you buy a future and other sells it, a position is opened in market. For you its a buy position and for seller its a short position. The
1. Options versus Futures. Explain the difference between foreign currency options and futures and when either might be most appropriately used. An option is a contract giving the buyer the right but not the obligation to buy or sell a given amount of foreign exchange at a fixed price for a specified time period. A future is an exchange-traded contract calling for future delivery of a standard amount of foreign currency at a fixed time, place, and price. The essence of the difference is that an option leaves the buyer with the choice of exercising or not exercising.
Futures are a contract or legal agreement, where an investor agrees to purchase a certain amount of a physical good or financial asset on a specific date for a set price.
The definition of future states something that is likely to happen at a later time. However, my definition of my future is with success, happiness, and love. Your future is something that you obtain through what you do today. It isn't given to you; it is earned through hard work. I have another challenge facing me, though, and it doesn't look like it is going to back down but neither am I.
A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today with delivery and payment occurring at a specified future date, the delivery date. Option contract is a contract that allows the holder to buy or sell an underlying security at a given price, known as the strike price. For example, a trader believes that the price of a stock will rise from its current price of $40 to a level nearing $100. Rather than purchasing the stock
Futures market prices depend on a continuous flow of information from around the world and require a high degree of transparency. Factors, such as climatic conditions, political situations, debt
Do you want to earn a stable income, but at the same time, be brave enough to take risks? Do you want to insure your assets and try your hand at trading on financial market? Do you have good business instinct? Are you interesed in world news? In this case, it is mandatory for you to know what is a futures contract. Futures contracts are unique invention, created to simplify the business life and make a high profit. Using futures, producers of goods can insure their products for years to come and portfolio managers can reduce the risks specific to their profession. Any successful futures contract has a crucial function: it meets the needs of a market.
In the above case for a contract to take place there must be an offer
Like an ordinary stock trade, two parties will work through their respective brokers, to transact a futures trade. An investor can only trade in the futures contracts that are supported by each exchange. In contrast, forwards are entirely customized and all the terms of the contract are privately negotiated between parties. They can be keyed to almost any conceivable underlying asset or measure. The settlement date, notional amount of the contract and settlement form (cash or physical) are entirely up to the parties to the contract.
Individuals engaging in this type of trading strategy are characterized by their attempt to profit from guessing the direction of the market
A business with weather exposure may choose to buy or sell a futures contract, Which is equivalently to a swap such that one counterparty gets paid if the degree Day over a specific period are greater than the strike level, and the other
Each party to a futures contract must deposit a sum of money known as “margin” with the clearing house. Margin payments act as a cushion against potential losses which the parties may suffer from future adverse price movements.
In the study it is proposed to study the price determination for exchange traded commodity and forecasting its future prices based on the different mathematical tools available.
a predetermined date and price on which the contract will be executed. The future date and
Spot markets are markets in where the assets are traded “on the spot” at the usual market prices, whereas futures market are financial markets where people trade for delivery of an asset or security on a specified future date.
This is to certify that the project entitled “Factors Affecting the Success and Failure of Futures Contracts” is research work done by Owais Javaid Qureshi, under my supervision, during March-April, 2012, submitted to the Department Of Business and Financial Studies, University Of Kashmir in partial fulfillment for the award of the Degree of Masters in Finance & Control