Chartered Accountant
525 Points
Joined July 2008
Futures: (In Laymen Language) Futures are the Contract whoes price are based on some other underlying asset. they are the contract whereby both the buyer and seller are obligated to fulfil the contract at specified date on pre speicifed rate.
Eg: Say forth there is world cup in your city and you are trying hard to get the tickets for staduim but all are sold out except some of the resevered quota so u come to know a person who is influencial and got him signed a note that says to issue 2 staduim tickets to holder of the note. so the note so signed by influencial person is Underlying asset bcoz it gives a options holder a right to buy the Orignal stadium ticket
Now Future Mechanism : Buyer of futures can buy relatively more number of futures with same price compared to which he can afford a single share of a company. ( Yes futures are quoted at very low and affordable price compared to Individula share of the company.)
Future Trading : Trading Futre is just like trading anyother security. The profit and loss is with all same economic mechanism.
On expiration date if the closing index value is higher then the rate at which investor has initally bought futures ( it means you bought at low rate and at time of epirations the actualt rate is high) then investors earn profit.
It similar to Buying at low and selling at high trend of economy.
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