Futures – backlog of finance/stock market (practical approac

Greetings  of  the  day  to  all  the  members  of  CCI  Family.

Friends my last Article was on “FUTURES –BACKLOG OF FINANCE/STOCK MARKET”

/articles/futures-backlog-of-finance-stock-market-15055.asp.

The Article covered theoretical knowledge of the various concepts used in Futures. There is a request to all the members to read my previous article before proceeding for this one.

            FUTURES – BACKLOG OF FINANCE/STOCK MARKET (PRACTICAL APPROACH)

Objective –

-          The objective of this Article is to help the Students to clear the Concepts of Futures from Exam Point of View

-          To help them to solve the questions relating to Futures

Scope of Article –

-          Example of Long & Short Position

-          Arbitrage Profit/Loss

-          Hedging

So let’s start with it –

Long & Short Position (Gain/Loss) -

EXPLANATION –

·         Suppose Mr. x an Investor decides to take long Position in the market i.e. he plans to buy 100 Shares @ Rs.100 after 1 month.

·         The Price of the share after 1 month turns out to be Rs.120, so in this it will be a profit for Mr. X, because the share will cost to him Rs.100 instead of Rs.120.

·         So it means that he has safeguard his position I month before by entering into a Future Contract.

·         But if the price turns out to be Rs.80 after I month, in this case Mr. x will suffer a loss of Rs.20, because now Mr. x will have to purchase the share @ 100 instead of Rs.80.

EXPLANATION –

·         Suppose Mr. X an Investor decides to take Short Position in the market i.e. he plans to sell 100 Shares @ Rs.100 after 1 month.

·         The Price of the share after 1 month turns out to be Rs.120, so in this it will be a loss for Mr. X, because now he will get Rs.100 instead of Rs.120.

·         So it means that even by taking short position, Mr. x  Suffered a loss of Rs.20

·         If the price of the share after I month turns out to be Rs.80, so in such case it will result in profit of Rs.20 for Mr. X, because by taking short position I month before Mr. x will get now Rs.100 instead of Rs.80.

ARBITRAGE PROFIT/LOSS –

Terms to be used in the Table –

·         FAIR FUTURE PRICE (FFP) –

-          It is the future price of security which can be called as “Optimum“ ·  

-          Fair means it will be equal to Break Even Point i.e. No Profit No Loss situation

-          By point of View of Investors it is called as “ What the amount of security Should be in Future i.e. Fair Price of Security

·         ACTUAL FUTURE PRICE (AFP) –

-          It is the Actual Price of the Security as on date of settlement

-          In other words it means Suppose Mr. x an Investor decides to take long Position in the market i.e. he plans to buy 100 Shares @ Rs.100 after 1 month. But the Actual Price turns out to be Rs.120 so in such case AFP = Rs.120.

EXPLANATION –

CASE-1 (AFP MORE THAN FFP)

Example –

-          FFP of a security 190 (Calculated through Formula) CMP is 180 & AFP is 195 (ROI is 12 %)

-          So it means that it is the Case-1 according to First Table

-          So in this case we will proceed accordingly  -

-          In the given case we thought that the Price of the Security (FFP) after 6 months would be 190,but in actual It turned out to be 195, So we will take short position in the Future Market i.e. we will sell the share @ 195 (Revenue for us)

-          Now in the Cash Market we will take Long Position or buy the security @ 180

-          So to buy the Security we need some money, so we will borrow from Bank Rs.180 @ 12% Rate of Interest

So Arbitrage Profit can be taken out in the following way –

CASE-2 (AFP LESS THAN FFP)

Example-

-          FFP of a security Rs.7760 (Calculated through Formula) CMP is 75 & AFP is Rs.7400 (ROI is 12 %) Lot Size - 100

-          So it means that it is the Case-2 according to First Table

-          So in this case we will proceed accordingly  -

-          In the given case we thought that the Price of the Security (FFP) after 6 months would be 7760,but in actual It turned out to be 7400, So we will take Long position in the Future Market i.e. we will buy the share @ 7400 (Cost for us)

-          Now in the Cash Market we will take Short Position or sell the security @ 7500 (Assuming we already hold Share)

-          So now by selling the share we have Received Rs.7500 which we will invest for 6 Months & get return @ 12%

HEDGING –

·         It is the process of taking an opposite position in the market in order to reduce loss caused by price difference

·         In other words we can say that the purpose of hedging is to reduce loss.

NOTE:    Don’t link the concept of Arbitrator with Hedging

So it brings to the end of my Article.

Hope it would be helpful to all of you.

Thanks & Regards

Sanyam Arora