On October 4, a trader buys 500 shares of HCL Tech at Rs. 1722 and sells the October futures at Rs.

October (expiry date), HCL Tech share price is 1715. HCL Tech future price is 1715. If the position is
the profit or loss.

Date Cash Future

Oct-04 Buy1722 sell1727
Oct-31 sell1715 buy1715
Arbitrage -3500 6000
overall profit 2500

Q.2
Consider a 3 months expiary feature contract on a non dividend paying stock
the underline stock is avialiable for rupees 700
if continuosly risk free rate 8%
SO 700
Find the future price T 3
F0=S0=e^rt RATE 8%
714.140938018729 FUTURE PRICE

Q.3
Consider reliance is availiable for rupess 1260. the risk free rate 6.5 % and 2 months expiary contract.
Find the future price

1273.72420522121

Q.4
Appolo tyres is avialibale at rupee 475.85. The stock is paying dividend of rupees 5 in 3 months time. Find the price of futures

Present value on Income is = I*E^-rt

I
4.91940659488344

Future value 478.645731270638

Q.5
Consider 6 months expiary SBI Furture contract. The SBI is avaibliabel at rupees 814.50 The stcok is paying a divind of rupess 7
The risk free rate is 6.5%
I SO 475.85
7.1146792453388 t 3
r 6.50%
Future value i ?

834.056401166483

Q.6
Consider a 3 months HDFC Future Contract is avliable at rupees 1695.15. The stcok is paying dividend yield 5% for 3 moths.
Find the future price.
F0=S0EXP^(r-y)t
1701.51874643619

Q.7
The current price of cotton is 400 per bale. The storage cost of rupees 100 bale per year.
Assuming the risk free rate is 7% contunuous component.
Calculate future price of 500 bales of cotton.

S0 = 400*500 200000 FO=(S0+U)e^rt

U= 100*500 50000
r= 7%
t= 1 year
F0 268127.045313554

Q.8
The settlement price of TCS futures contract on a particular day was Rs. 4600. Initial margin is Rs. 1,03,000 while maintenan
Multiple of each contract is 175 shares. The settlement price on next five days as follows -

Day settlement Price

1 4700
2 4500
3 4650
4 4750
5 4700
Calculate mark to market M 2 M
In the accounts of investors who has gone wrong at rupees 4600

DAY SETTLEMENT PRICE OPENING BALANCE MTM MARGIN CALL

1 4700 103000 17500
2 4500 120500 -35000
3 4650 85500 26250
4 4750 111750 17500
5 4450 129250 -52500 5650
-26250
SUM OF ALL IN MINUS LOSS IF IN PLUS GAIN
CALCULATION MTM
DAY 1 17500
DAY 2 -35000
DAY 3 26250
DAY 4 17500
DAY 5 -52500

MARGIN CALL IS CALCULATED ONLY IF OPENING BALANCE AND M 2 M IS LESS THEN THE MAINTAINANCE MARGIN
76750 WHICH IS LESS THEN 82400
THE DIFFERENCE IS 5650

The investor has gone long for SBI future at Rs. 780. The initial margin is 90000, maintenance margin is 80% = 72000 and the

Q.9
INITIAL MARGIN IN 90000 MAINTAINANCE IS 72000 LOT SIZE 750
DAY SETTLEMENT PRICE OPENING BALANCE MTM MARGIN CALL
1 832 90000 39000
2 820 129000 -9000
3 849 120000 21750
4 859 141750 7500
5 807 149250 -39000
20250
CALCULATE MTM
DAY 1 39000
DAY 2 -9000
DAY 3 21750
DAY 4 7500
 DAY 5 -39000

1. Futures Contract

A futures contract is a standardized agreement between two parties to buy or sell an asset at a specific price on a specific futu

Key Features of Futures Contracts:

Standardization: Contract terms like quantity, quality, and delivery date are predetermined by the exchange.
Traded on Exchanges: Highly liquid and regulated, making them accessible to a broader audience.
Margin Requirements: Buyers and sellers must deposit an initial margin and maintain a margin balance to protect against lo
Mark-to-Market: Profits and losses are calculated daily based on market prices, ensuring transparency.
Settlement: Can be settled in two ways:
Physical Delivery: The actual asset is exchanged (less common).
Cash Settlement: The difference between the agreed price and the market price is paid.

Examples:

A wheat farmer uses a futures contract to lock in a price for their harvest to protect against price drops.
A trader buys an oil futures contract, betting that oil prices will rise.

2. Forward Contract

A forward contract is a customized agreement between two parties to buy or sell an asset at a specific price on a specific date

Key Features of Forward Contracts:

Customization: Tailored terms, such as quantity, quality, delivery date, and price, to meet specific needs of the parties involv
Over-the-Counter (OTC): Not traded on exchanges, which can lead to lower liquidity and higher counterparty risk.
No Daily Settlement: Profits and losses are only realized at the end of the contract (maturity).
Higher Risk: No clearinghouse involved, so there's a risk that one party may default.
Settlement:
Typically involves physical delivery, but cash settlement is also possible.

Examples:

An importer agrees to buy foreign currency at a fixed rate in the future to hedge against currency fluctuations.
A farmer agrees with a food company to sell their crops at a fixed price months ahead.

Comparison Between Futures and Forward Contracts:

 Feature Futures Contract Forward Contract

Traded OTC (privately

Trading Venue Traded on exchanges
negotiated)

Standardization Standardized terms Customized terms

Liquidity High Low
Daily (mark-to-
Settlement At maturity
market)
Minimal
Counterparty Risk (clearinghouse High (no intermediary)
involved)
Flexibility Less flexible Highly flexible
Hedging by
Hedging by businesses with
Example Usage speculators and
specific needs
traders

DIFFERENCE
Exchange-Traded
Feature OTC Derivatives
Derivatives

Private, between two

Trading Venue Centralized exchange
parties

High, tailored to
Customization Standardized contracts
specific needs

Regulation Less regulated Highly regulated

Counterparty Risk High Low (due to clearinghouses)
Liquidity Low High

Forwards, Swaps, Futures, Exchange-Traded

Examples
Custom Options Options

Pricing Transparency Limited Transparent

TYPES OF DERIVATIVES
1. Forwards

Definition: A private agreement between two parties to buy or sell an asset at a fixed price on a specific future date.
Key Feature: Customized contracts, traded over-the-counter (OTC).
Example: A farmer agrees to sell wheat to a buyer at ₹1,500 per quintal in 6 months.
2. Futures

Definition: A standardized contract to buy or sell an asset at a fixed price on a specific future date, traded on an exchange.
 Key Feature: Highly regulated and transparent with daily profit/loss settlements.
Example: A trader buys gold futures betting the price will rise in the future.
3. Options

Definition: A contract giving the buyer the right (but not the obligation) to buy or sell an asset at a fixed price within a specifi
Types:
Call Option: Right to buy.
Put Option: Right to sell.
Example: You buy a call option to purchase 100 shares of a stock at ₹500 per share, even if the price rises to ₹600.
4. Swaps

Definition: A private agreement between two parties to exchange cash flows or financial obligations, usually based on intere
Key Feature: Used to manage financial risks.
Example: Two companies swap interest rate payments – one pays a fixed rate, and the other pays a variable rate.
5. Credit Derivatives

Definition: A contract that transfers credit risk between parties.

Key Feature: Used to protect against loan defaults.

Comparison Table: Cash Market vs. Derivatives Market

Feature Cash Market Derivatives Market

Direct buying and Trading contracts based on

Definition
selling of assets. underlying assets.

Immediate ownership No ownership, only contract

Ownership
of the asset. obligations.

Spot or near-
Settlement on a future date
Settlement immediate
as per the contract.
settlement (T+1/T+2).

Limited to market Higher risk due to leverage

Risk
price fluctuations. and speculation.

Investment and Hedging risks, speculation,

Purpose
wealth creation. and arbitrage.

Stocks, bonds, Futures, options, forwards,

Example Instruments
commodities. swaps.

Highly regulated, especially

Less complex
Regulation for exchange-traded
regulation.
derivatives.
 Investors looking for Speculators, hedgers, and
Participants
direct ownership. arbitrageurs.

How do you manage the future price exposure?

1. Lock the price - farmer example - can't breach

2. No obligation - can breach the contract

Generic Derivative Products and Their Meaning

1. Futures Contracts

Meaning: Agreements to buy or sell an asset at a predetermined price on a future date.

Purpose: Used for hedging or speculation to lock in future prices.
2. Options Contracts

Meaning: Contracts that give the holder the right (but not the obligation) to buy (call option) or sell (put option) an underlyin
Purpose: Used for hedging or speculation on price movements.

3. Forward Contracts

Meaning: Customized agreements between two parties to buy or sell an asset at a specified price on a future date.
Purpose: Typically used for hedging purposes to lock in prices, with terms tailored to the parties involved.

4. Swaps

Meaning: Contracts in which two parties agree to exchange cash flows or other financial instruments at specified future date
Purpose: Used for managing interest rate, currency, and commodity price risks.

Another strategy - basis/arbitrage

basis denotes the rel bet cash price/spot and future price of underlying
long basis - buy cash, sell future
short basis - sell cash, buy future

Trading Strategies: Directional & Non-Directional

1. Directional Strategies (Bullish, Bearish)
Directional trading strategies aim to profit from expected price movements in a particular direction. These strategies are base

Bullish Strategy: Traders expect the price of an asset to increase and buy (go long) the asset. Common methods include buyi
Bearish Strategy: Traders expect the price of an asset to fall and take a short position, selling the asset to profit from a declin

These strategies are relatively straightforward and are used when there is a clear market trend or economic outlook that favor

2. Non-Directional Strategies (Inter-Market & Intra-Market Spread)

Non-directional strategies seek to profit from price relationships or volatility between related markets or contracts without ha

Inter-Market Spread: Involves taking positions in two different but correlated markets. Traders may buy one asset while sim
Intra-Market Spread: Involves trading two contracts within the same market (e.g., different expiration dates of the same fut

Derivatives: Meaning
A derivative is a financial contract whose value is derived from the price of an underlying asset, such as stocks,
bonds, commodities, or market indices. Derivatives are used for various purposes, including hedging, speculation, and arbitra

Common Types of Derivatives:

1. Futures Contracts: Agreements to buy or sell an asset at a future date for a price agreed today.
2. Options Contracts: Gives the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price.
3. Forwards Contracts: Customized agreements to buy or sell an asset at a future date for a price determined today, traded
4. Swaps: Contracts to exchange cash flows based on different financial instruments, like interest rates or currencies.

Underlying Financial Product and Financial Product

1. Underlying Financial Product

The financial asset or instrument upon which a derivative is based. The value of the derivative is derived from this asset.

Examples in Points:

Stocks: Shares of companies like Apple, Reliance, etc.

Bonds: Government or corporate debt securities.
Commodities: Gold, oil, wheat, etc.
Currencies: USD, EUR, INR, etc.
Market Indices: Nifty 50, S&P 500, etc.
Interest Rates: LIBOR, SOFR, etc.
2. Financial Product

A broader category that includes all instruments or contracts that can be traded in the financial markets. It includes derivative

Examples in Points:

Stocks: Equity instruments providing ownership in companies.

Bonds: Debt instruments issued by governments or corporations.
Mutual Funds: Pooled investments managed by professionals.
Derivatives: Contracts like futures, options, and swaps.
Exchange-Traded Funds (ETFs): Funds traded like stocks on exchanges.
Real Estate Investment Trusts (REITs): Investments in real estate portfolios.
Cryptocurrencies: Digital currencies like Bitcoin or Ethereum.

Currency Forward – Fix the price for dollars today, and buy it later. This is called Outright forward contract and the price is
forwards rate. A forward transaction is a contractual commitment to buy or sell specified amount of foreign exchange at a
specified future date.
Example – Dollars price is fixed to transact in a future date. (same as forward contract)

Derivatives and Underlying

- Stock Options and futures(d) – Corresponding stocks(u)
- Index options and futures(d) – Corresponding Index(u)
- Currency forward, options and futures – Corresponding Currencies
October futures at Rs. 1727 simultaneously. On 31st Q.1
715. If the position is now squared off what will be

e. Find the price of futures consider a 3 months expiary future contrct and a risk free rate of 6.5%

paying a divind of rupess 7 Rupees for 3 months.

nd yield 5% for 3 moths.

1,03,000 while maintenance margin is 82,400.

 CLOSING BALANCE
120500
85500
111750
129250
82400 5650

LOSS IF IN PLUS GAIN

ANCE MARGIN

gin is 80% = 72000 and the lot size is 750

780
CLOSING BALANCE
129000
120000
141750
149250
110250
cific price on a specific future date. These contracts are traded on organized exchanges, like the Chicago Mercantile Exchange (CME).

e exchange.

lance to protect against losses.

ific price on a specific date in the future. These contracts are privately negotiated and are not traded on exchanges.

needs of the parties involved.

ounterparty risk.

fluctuations.
pecific future date.

, traded on an exchange.
fixed price within a specific time.

ce rises to ₹600.

ns, usually based on interest rates or currencies.

a variable rate.
ell (put option) an underlying asset at a specific price before a specified date.

on a future date.

nts at specified future dates. Common types include interest rate swaps, currency swaps, and commodity swaps.
 These strategies are based on market trends and involve taking positions that benefit from either rising or falling prices.

mon methods include buying stocks, futures, or options. The goal is to sell at a higher price later to realize a profit.
asset to profit from a decline. This can involve short-selling stocks or using bearish options strategies (like put options).

conomic outlook that favors one direction.

ets or contracts without having to predict price direction.

ay buy one asset while simultaneously selling another related asset, such as buying crude oil futures while selling natural gas futures, profi
ation dates of the same futures contract). This strategy profits from the price difference between contracts, such as trading a long position

h as stocks,
g, speculation, and arbitrage.

specified price.
determined today, traded over-the-counter (OTC).
rates or currencies.

rived from this asset.

rkets. It includes derivatives and other traditional instruments.

d contract and the price is the

of foreign exchange at a
The settlement price of TCS futures contract on a particular day was Rs. 4600. Initial margin is Rs. 1,03,000 while
Multiple of each contract is 175 shares. The settlement price on next five days as follows -

Day settlement Price

1 4700
2 4500
3 4650
4 4750
5 4700
Calculate mark to market M 2 M
In the accounts of investors who has gone wrong at rupees 4600

DAY SETTLEMENT PRICE OPENING BALANCE MTM

1 4700 103000 17500
2 4500 120500 -35000
3 4650 85500 26250
4 4750 111750 17500
5 4450 129250 -52500
-26250
rcantile Exchange (CME).
alling prices.

elling natural gas futures, profiting from price differences.

such as trading a long position in a nearby contract while shorting a distant contract.
600. Initial margin is Rs. 1,03,000 while maintenance margin is 82,400.
days as follows -
MARGIN CALL CLOSING BALANCE
120500
85500
111750
129250
5650 76750

5650
Date :- 22/11/2024
Q. 1 Points
23600 56
FU 23544
BU Buying

FU 23500 -50

Unlimited profit Unlimited loss

OPTIONS
Profit is unlimited and loss is limited to the Premium
Q.
Calculate Payoff
net payoff
Position and Action for the following data given below

Call option Premium Net pay off Net pay

strike price (k) Nifty expiry(s) paid max(s-k 0) off Position Action
24000 25000 35 1000 965 ITM Exercise
24000 24000 35 0 -35 ATM Lapse
24000 25100 35 1100 1065 ITM Exercise
24000 23100 35 0 -35 OTM Lapse
24000 23900 35 0 -35 OTM Lapse

Q
Calculate Payoff net payoff postion and action for the following detail given below

Call option Nifty at expiry Premium

bank nifty(K) (S) paid payoff Net payoff Position Action
51000 51500 348 500 152 ITM Exercise
51000 51700 348 700 352 ITM Exercise
51000 51000 348 0 -348 ATM Lapse
51000 50000 348 0 -348 OTM Lapse
51000 51800 348 800 452 ITM Exercise

Q
Calculate intrincis value, time value, net payoff, position, exercise
Intrincis value = max of S-K,0
Time value = difference btw premium and time value

INTRINSIC
SL.No. Option Stock Price(S) Exercise price(K) Option premium Position VALUE
1 Call 58 55 5.5 ITM 3
2 Call 40 40 4.15 ATM 0
 3 Put 105 100 9 OTM 0
4 Put 104 110 10 ITM 6
5 Put 12 15 0.5 ITM 3
6 Call 37 35 3.5 ITM 3
7 Put 38 38 2 ATM 0
8 Call 45 40 2 ITM 5

Intrinsic value for PUT option max of (K-S,0)

INTRINSIC
SL.No. Option Stock Price(S) Exercise price(K) Option premium Position VALUE
1 CALL 1220 1200 10 ITM 20
2 CALL 1230 1200 11 ITM 30
3 CALL 1200 1200 12 ATM 0
4 PUT 1210 1220 10 ITM 10
5 PUT 1190 1200 10 ITM 10
6 PUT 1180 1200 12 ITM 20
7 CALL 1230 1200 11 ITM 30
8 PUT 1200 1200 11 ATM 0
9 CALL 1240 1200 10 ITM 40
10 PUT 1210 1200 11 OTM 0
OTM WILL NOT TAKE LOSS
Profit/Loss Points Profit/Loss
1250 23600 50 1400
CE 23544
BU Buying
23500 -188.25 -4.706
-1250

CALL ME S JAYAD HAI TOH =ITM

S Kaam hai toh =OTM
= HAI TOH ATM

PUT ME K JAYADA HAI TOH ITM

K kaam hai toh OTM
.= K AND S TOH ATM

Time Value
2.5
4.15
 9
4
-2.5
0.5
2
-3

Time Value
10
19
-12
0
0
8
19
-11
30
-11
OTM WILL NOT TAKE LOSS