Futures Contracts

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Information about Futures Contracts
Finance

Published on February 14, 2014

Author: Hedgemantra

Source: slideshare.net

Description

A basic introduction to Futures Contracts. Crisp, concise download of what Future Contracts are. To know more visit us at www.hedgemantra.com

Futures Contracts

What is a Currency Futures Contract ?  Contract to exchange one currency for another.  Exchange on a specified date.  Specified Date must be in the future.  Rate is fixed on the date of purchase of contract.

Currencies Currency Futures Contracts are available for the following currencies.  US Dollar  Euro  British Pound  Japanese Yen

Trading in Futures  Traded on the National Stock Exchange.  Expiry Dates of Contracts are Fixed.  There is one contract expiring every month.  Contracts expire during the last week of every month.  Contracts available at different prices.

Unit of Trading  For USD, 1 Futures Contract = 1,000 USD  For EUR, 1 Futures Contract = 1,000 EUR  For GBP, 1 Futures Contract = 1,000 GBP  For JPY, 1 Futures Contract = 100,000 JPY (This is because JPY alone is traded to the base 100 rather than 1 )

Costs in Futures Trading  Based on the prevailing purchase price, margin is to be placed*.  Brokerage of 0.03% is payable on purchase and sale*.  NSE Charges a Transaction Fee of 0.00195% on purchase and sale.  NSE levies a Securities Transaction Tax of 0.017% on sale. * Margin and Brokerage are to be placed with the DEMAT provider.

Steps in Futures Trading  Choose a suitable contract based on exposure maturity date.  Place a margin (For Ex. 6%) to buy the contract.  Brokerage and Transaction Fee will be charged.  On a daily basis, Mark to Market (MTM) will take place.  MTM Loss will reduce margin and MTM gain will increase margin.  Contract is squared off when margin balance is exhausted.  Contract expires on the maturity date.

Mark to Market (MTM)  Purchase Price of contract is the base.  Every day, difference between previous closing price and current closing price is debited / credited to the account.  This debiting / crediting is called MTM.  MTM happens at the end of every day.  MTM Loss will reduce margin and MTM gain will increase margin.  Contract is squared off when margin balance is exhausted.

Hedging using Futures Case 1 Say Contract purchase price is 50 / $ and spot rate on maturity is 55/ $.  Purchase Price paid = Rs. 50.  MTM Gain (Spot Rate > Purchase Price) = Rs. 5 {Rs. 55 – Rs.50}  Price paid for currency on maturity date = Rs. 55 (spot rate)  Effective Cost = Rs. 50 {55 (spot price on maturity) – 5 (MTM Gain)} Hence, by paying 50/$, user is unaffected by forex fluctuations.

Hedging using Futures Case 2 Say Contract purchase price is 50 / $ and spot rate on maturity is 45/ $.  Purchase Price paid = Rs. 50.  MTM Loss (Spot Rate < Purchase Price) = Rs. 5 {Rs. 45 – Rs.50}  Price paid for currency on maturity date = Rs. 45 (spot rate)  Effective Cost = Rs. 50 {45 (spot price on maturity) + 5 (MTM Loss)} Hence, by paying 50/$, user is unaffected by forex fluctuations.

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