EVOLUTION OF FUTURES TRADING AND ITS PRESENT STATUS:

Organized futures market evolved in India by the setting up of "Bombay Cotton Trade
Association Ltd." in 1875. In 1893, following widespread discontent amongst leading
cotton mill owners and merchants over the functioning of the Bombay Cotton Trade
Association, a separate association by the name "Bombay Cotton Exchange Ltd." was
constituted. Futures trading in oilseeds was organized in India for the first time with the
setting up of Gujarati Vyapari Mandali in 1900, which carried on futures trading in
groundnut , castor seed and cotton. Before the Second World War broke out in 1939
several futures markets in oilseeds were functioning in Gujarat and Punjab.

Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the
Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd.,was set up
in 1927 for organizing futures trading in Raw Jute. These two associations amalgamated in
1945 to form the present East India Jute & Hessian Ltd., to conduct organized trading in both
Raw Jute and Jute goods. In case of wheat, futures markets were in existence at several
centres at Punjab and U.P. The most notable amongst them was the Chamber of Commerce
at Hapur, which was established in 1913. Other markets were located at Amritsar, Moga,
Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab and Muzaffarnagar,
Chandausi, Meerut, Saharanpur, Hathras, Gaziabad, Sikenderabad and Barielly in U.P.

Futures market in Bullion began at Mumbai in 1920 and later similar markets came up at
Rajkot , Jaipur , Jamnagar , Kanpur, Delhi and Calcutta. In due course several other
exchanges were also created in the country to trade in such diverse commodities as pepper,
turmeric, potato, sugar and gur(jaggory).

After independence, the Constitution of India brought the subject of "Stock Exchanges and
futures markets" in the Union list. As a result, the responsibility for regulation of commodity
futures markets devolved on Govt. of India. A Bill on forward contracts was referred to an
expert committee headed by Prof. A.D.Shroff and Select Committees of two successive
Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was
enacted. The Act provided for 3-tier regulatory system;

(a) An association recognized by the Government of India on the recommendation of

Forward Markets Commission,

(b) The Forward Markets Commission (it was set up in September 1953) and

(c) The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July,1954

The Act divides the commodities into 3 categories with reference to extent of regulation, viz:
 (a) The commodities in which futures trading can be organized under the auspices of
recognized association.

(b) The Commodities in which futures trading is prohibited.

(c) Those commodities which have neither been regulated for being traded under the
recognized association nor prohibited are referred as Free Commodities and the association
organized in such free commodities is required to obtain the Certificate of Registration from
the Forward Markets Commission.

In the seventies, most of the registered associations became inactive, as futures as well as
forward trading in the commodities for which they were registered came to be either
suspended or prohibited altogether.

The Khusro Committee (June 1980) had recommended reintroduction of futures trading in
most of the major commodities , including cotton, kapas, raw jute and jute goods and
suggested that steps may be taken for introducing futures trading in commodities, like
potatoes, onions, etc. at appropriate time. The government, accordingly initiated futures
trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar
Pradesh.

After the introduction of economic reforms since June 1991 and the consequent gradual trade
and industry liberalization in both the domestic and external sectors, the Govt. of India
appointed in June 1993 one more committee on Forward Markets under Chairmanship of
Prof. K.N. Kabra. The Committee submitted its report in September 1994. The majority
report of the Committee recommended that futures trading be introduced in
1) Basmati Rice
2) Cotton and Kapas
3) Raw Jute and Jute Goods
4) Groundnut , rapeseed/mustard seed , cottonseed , sesame seed , sunflower seed , safflower
seed , copra and soybean , and oils and oilcakes of all of them.
5) Rice bran oil
6) Castor oil and its oilcake
7) Linseed
8) Silver and
9) Onions.
The committee also recommended that some of the existing commodity exchanges
particularly the ones in pepper and castor seed , may be upgraded to the level of international
futures markets.

Characteristics of futures trading

A "Futures Contract" is a highly standardized contract with certain distinct features. Some of
the important features are as under :
a. Futures trading is necessarily organized under the auspices of a market association so
that such trading is confined to or conducted through members of the association in
accordance with the procedure laid down in the Rules & Bye-laws of the association.
b. It is invariably entered into for a standard variety known as the "basis variety" with
permission to deliver other identified varieties known as "tenderable varieties".
c. The units of price quotation and trading are fixed in these contracts , parties to the
contracts not being capable of altering these units.
d. The delivery periods are specified.
e. The seller in a futures market has the choice to decide whether to deliver goods
against outstanding sale contracts. In case he decides to deliver goods, he can do so not only
at the location of the Association through which trading is organized but also at a number of
other pre-specified delivery centres.
f. In futures market actual delivery of goods takes place only in a very few cases.
Transactions are mostly squared up before the due date of the contract and contracts are
settled by payment of differences without any physical delivery of goods taking place.

ECONOMIC BENEFITS OF THE FUTURES TRADING AND ITS PROSPECTS:

Futures contracts perform two important functions of price discovery and price risk
management with reference to the given commodity. It is useful to all segments of economy.
It is useful to producer because he can get an idea of the price likely to prevail at a future
point of time and therefore can decide between various competing commodities, the best that
suits him.It enables the consumer get an idea of the price at which the commodity would be
available at a future point of time. He can do proper costing and also cover his purchases by
making forward contracts. The futures trading is very useful to the exporters as it provides an
advance indication of the price likely to prevail and thereby help the exporter in quoting a
realistic price and thereby secure export contract in a competitive market. Having entered
into an export contract, it enables him to hedge his risk by operating in futures market. Other
benefits of futures trading are:

(i) Price stabilization-in times of violent price fluctuations - this mechanism dampens the
peaks and lifts up the valleys i.e. the amplititude of price variation is reduced.

(ii) Leads to integrated price structure throughout the country.

(iii) Facilitates lengthy and complex, production and manufacturing activities.

(iv) Helps balance in supply and demand position throughout the year.

(v) Encourages competition and acts as a price barometer to farmers and other trade
functionaries.

Futures trading is also capable of being misused by unscrupulous speculators. In order to

safeguard against uncontrolled speculation certain regulatory measures are introduced from
time to time. They are:
a. Limit on open position of an individual operator to prevent over trading;
b. Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in
prices;
c. Special margin deposits to be collected on outstanding purchases or sales to curb
excessive speculative activity through financial restraints;
d. Minimum/maximum prices to be prescribed to prevent future prices from falling
below the levels that are un remunerative and from rising above the levels not warranted by
genuine supply and demand factors.

During shortages, extreme steps like skipping trading in certain deliveries of the contract,
closing the markets for a specified period and even closing out the contract to overcome emergency
situations are taken.

FORWARD CONTRACT:

A forward contract is an agreement to buy or sell an asset on a specified date for a specified
price. One of the parties to the contact assumes a long position and agrees to buy the
underlined asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for same price.
Other contract details like delivery date, price in quantity are negotiated bilaterally by the
parties to the contact. The forward contracts are normally traded outside the exchanges.

SALIENT FEATURES OF FORWARD CONTRACT:

 They are bilateral contracts and hence expose to counter party risk.

 Each contract is custom designed and hence is unique in terms of contract size
expiration date and asset type and quality.

 The contract price is generally not available in public domain.

 On the expiration date, contract has to be settled by the delivery of the asset.

 If the party wishes to reverse the contract, it has to compulsorily go to the same
counterparty which often results in high prices being charged.
However forward contracts in certain markets have become very standardized as in case of
foreign exchange, thereby reducing transaction cost and increasing transaction volume. This
process of standardization reaches its limit in organized futures market.
Forward contracts are very useful in hedging and speculation. The classic hedging
application would be that of an exporter who expects to receive payment in dollars 3 months
later. He is exposed to the risk of exchange rate fluctuations. By using the currency forward
market, to sell dollars forward, he can look on to a rate today and reduce his uncertainty.
Similarly an importer who is required to make a payment in dollars 2 months hence can
reduce his exposure to exchange rate fluctuations by buying dollars forward.
If a speculator has information or analysis which forecasts and upturn in a price, then he can
go long on the forward market instead of cash market. The speculator would go long on a
forward, wait for the price to raise and then take a reversing transaction to book profits.
Speculators may well be required to deposit a margin upfront. However, this is generally a
relatively small portion of the value of the asset underlying the forward contract. The use of
forward markets here suppliers leverage to the speculators.

LIMITATIONS:

Forward markets worldwide are affected by several problems

 Lack of centralization of trading

 Illiquidity

 Counterparty risk
In the first 2 these, the basic problem is that of too much flexibility & generality. The
forward market is like a real estate market in that any two of consenting adults can form
contracts against each other. This often makes them design terms of the deal which are very
convenient in that specific situation but makes the contract non-tradable. Counterparty risk
arises from the possibility of default by anyone party to their transaction. If one of the two
sides declares bankruptcy, the other suffers. Even when the forward markets traded
standardized contracts and hence avoid problem of illiquidity still the counterparty risk
remains very serious issue.

DIFFERENCE BETWEEN FUTURES AND FORWARDS

FUTURES FORWARDS

1.Trade on an organized exchange 1. Over The Counter in nature

2. Standardized contract terms 2. Customized contract terms

3. More liquid 3. less liquid

4. Requires margin payments 4. No margin payment

5. Follows daily settlement 5. Settlement happens at end of period

ADVANTAGES OF FUTURES:
 Leverage: one of the key benefits of trading in the future market is that it offers the
trader, financial leverage. It is the ability of a trader to control a large amount of a
commodity/script with a comparatively small amount of capital, as such leverage magnifies
both gains and losses in the future market. The benefit of leverage is available because of the
margin concept. When you buy a stock, the amount of money required is equal to price of
stock. However, unlike trading a stock, a futures contract transaction requires both buyer and
seller to post performance margin. Minimum margin require represent a very small
percentage of contract’s total value. To trade a futures contract, the amount you deposit is
initial margin. Based on closing price on each day that you have at open position, your
account is either debited or credited daily for you to maintain your position. Subsequent to
posting, you should maintain a minimum margin level called maintenance margin. If a debit
reduces your account below that level, you will be asked to deposit enough funds to bring
your account back up to initial margin level. This request for additional funds is margin call
because margins represent a very small portion of your total market exposure, future
positions are considered highly leveraged. Such leverage, the ability to trade contracts with
large underlying values is 1 reason. Profits and losses in futures can be > trading underlying
cash contracts. This can be an attractive feature of futures trading because little capital is
required to control large positions at the same time bad trades can accrual losses very
quickly. In fact a trader can lose more than his initial margin when trade futures. Hence a
successful trader must develop a sound trading plan and exercise great discipline in their
trading activities.

 Liquidity: Liquidity is the characteristics of a market absorb large transactions before

a substantial change in the price. Liquid market easily matches the buyer and the seller to
quickly transact a business at a fair price. Some traders often equate liquidity with trading
volume, concluding that only markets have higher number of contracts traded or the most
liquid. For trader or the firm designated as the market maker that makes two side markets
(both bids and offers) for a specific quantity. Make sure the future contract you select have
enough volume and open interest to ensure that you exit your position just as easily as he
entered it. Getting current market information (bid and offers and qualities at each) is also
helpful.

 Transparency: Many futures market are considered to be transparent because

ordered flow is open and fair. Everyone has an equal opportunity for the trade. When an
order enters the market place, the order fills at the best price for the customer or the client,
regardless of the size of the order. With the advent of the electronic trading, transparency has
reached new heights as all transactions can be viewed online in real time. It means all market
participants equal in terms of market access.

 Financial integrity: When making an investment it’s important to have confidence

that the person on the other side of the trade will acknowledge and accept your transaction.
Future markets give you this confidence through the system that guarantees integrity of your
trader. Trading service provides in conjunction with their clearing member firms create a two
tier guarantee system to protect the integrity of the futures and options market. One tier
system is that the clearing service provider acts as the counter party to the future and option
traders acting as a buyer to every seller and vice versa. Other tier is the clearing firms extend
their own guarantee to buyers and sellers who are not clearing firms. All firms and
individuals do not hold memberships or ownership interest in the clearing house. They must
clear their trades in the clearing firm, which then guarantee these trades to the clearing house.
This allows the marker participants to rest easier because clearing firms will make good on
the trades they guarantee even if the original counterparty defaults.

FUTURE TRADERS:
n General Classes of Futures Traders
u futures commission merchants
u locals
u dual trading
n Classification by Trading Strategy
u Hedger:
Hedgers are those who protect themselves from the risk associated with the
price of an asset by using derivatives. A person keeps a close watch upon the
prices discovered in trading and when the comfortable price is reflected
according to his wants, he sells futures contracts. In this way he gets an
assured fixed price of his produce.

In general, hedgers use futures for protection against adverse future price
movements in the underlying cash commodity. Hedgers are often businesses,
or individuals, who at one point or another deal in the underlying cash
commodity.

Take an example: A Hedger pay more to the farmer or dealer of a produce if

its prices go up. For protection against higher prices of the produce, he hedge
the risk exposure by buying enough future contracts of the produce to cover
the amount of produce he expects to buy. Since cash and futures prices do
tend to move in tandem, the futures position will profit if the price of the
produce rise enough to offset cash loss on the produce.

u Speculator:
Speculators are some what like a middle man. They are never interested
in actual owing the commodity. They will just buy from one end and sell
it to the other in anticipation of future price movements. They actually
bet on the future movement in the price of an asset.

They are the second major group of futures players. These participants
include independent floor traders and investors. They handle trades for
their personal clients or brokerage firms.

Buying a futures contract in anticipation of price increases is known as

‘going long’. Selling a futures contract in anticipation of a price decrease
is known as ‘going short’. Speculative participation in futures trading
has increased with the availability of alternative methods of
participation.

Speculators have certain advantages over other investments they are as

follows:

• If the trader’s judgement is good, he can make more money in the

futures market faster because prices tend, on average, to change
more quickly than real estate or stock prices.
 • Futures are highly leveraged investments. The trader puts up a small
fraction of the value of the underlying contract as margin, yet he can
ride on the full value of the contract as it moves up and down. The
money he puts up is not a down payment on the underlying contract,
but a performance bond. The actual value of the contract is only
exchanged on those rare occasions when delivery takes place.

u spreader
u arbitrageur:
According to dictionary definition, a person who has been officially chosen to
make a decision between two people or groups who do not agree is known as
Arbitrator. In commodity market Arbitrators are the person who take the
advantage of a discepancy between prices in two different markets. If he finds
future prices of a commodity edging out with the cash price, he will take
offsetting positions in both the markets to lock in a profit. Moveover the
commodity futures investor is not charged interest on the difference between
margin and the full contract value.
n Classification by Trading Style
u scalpers
u day traders
u position traders

APPLICATION OF FUTURES

UNDERSTANDING BETA :

The index model suggested by William Sharpe offers insights into portfolio diversification. It
express the excess return on a security or a portfolio as a function of market factors and non
market factors. Market factors are those factors that affect all stocks and portfolios. These
would include factors such as inflation, interest rates, business cycles etc. Non-market factors
would be those factors which are specific to a company, and do not affect the entire market.
The market factors affect all firms. The unexpected change in these factors causes
unexpected changes in the rates of returns on the entire stock market. Each tock however
responds to these factors to different extents. Beta of a stock measures the sensitivity of the
stocks responsiveness to these market factors. Similarly, Beta of a portfolio, measures the
portfolios responsiveness to these market movements. Given stock beta’s, calculating
portfolio beta is simple. It is nothing but the weighted average of the stock betas.

The index has a beta of 1. Hence the movements of returns on a portfolio with a beta of one
will be like the index. If the index moves up by ten percent, my portfolio value will increase
by ten percent. Similarly if the index drops by five percent, my portfolio value will drop by
five percent. A portfolio with a beta of two, responds more sharply to index movements. If
the index moves up by ten percent, the value of a portfolio with a beta of two will move
up by twenty percent. If the index drops by ten percent, the value of a portfolio with a beta of
two, will fall by twenty percent. Similarly, if a portfolio has a beta of 0.75, a ten percent
movement in the index will cause a 7.5 percent movement in the value of the portfolio. In
short, beta is a measure of the systematic risk or market risk of a portfolio. Using index
futures contracts, it is possible to hedge the systematic risk. With this basic understanding,
we look at some applications of index futures.

We look here at some applications of futures contracts. We refer to single stock futures.
However since the index is nothing but a security whose price or level is a weighted a verage
of securities constituting an index, all strategies that can be implemented using stock futures
can also be implemented using index futures.

HEDGING: LONG SECURITY, SELL FUTURES:

Futures can be used as an effective risk-management tool. Take the case of an investor who
holds the shares of a company and gets uncomfortable with market movements in the short
run. He sees the value of his security falling from Rs.450 to Rs.390. In the absence of stock
futures, he would either suffer the discomfort of a price fall or sell the security in anticipation
of a market upheaval. With security futures he can minimize his price risk. All he need do is
enter into an offsetting stock futures position, in this case, take on a short futures position.
Assume that the spot price of the security he holds is Rs.390. Two-month futures cost him
Rs.402. For this he pays an initial margin. Now if the price of the security falls any further,
he will suffer losses on the security he holds. However, the losses he suffers on the security,
will be offset by the profits he makes on his short futures position. Take for instance that the
price of his security falls to Rs.350. The fall in the price of the security will result in a fall in
the price of futures. Futures will now trade at a price lower than the price at which he entered
into a short futures position. Hence his short futures position will start making profits. The
loss of Rs.40 incurred on the security he holds, will be made up by the profits made on
his short futures position Index futures in particular can be very effectively used to get rid of
the market risk of a portfolio. Every portfolio contains a hidden index exposure or a market
exposure. This statement is true for all portfolios, whether a portfolio is composed of index
securities or not. In the case of portfolios, most of the portfolio risk is accounted for by index
fluctuations (unlike individual securities, where only 30-60% of the securities risk is
accounted for by index fluctuations). Hence a position LONG PORTFOLIO + SHORT
NIFTY can often become one-tenth as risky as the LONG PORTFOLIO position!
Suppose we have a portfolio of Rs. 1 million which has a beta of 1.25. Then a complete
hedge is obtained by selling Rs.1.25 million of Nifty futures. Warning: Hedging does not
always make money. The best that can be achieved using hedging is the removal of
unwanted exposure, i.e. unnecessary risk. The hedged position will make less profits than the
unhedged position, half the time. One should not enter into a hedging strategy hoping to
make excess profits for sure; all that can come out of hedging is reduced risk.

SPECULATION: BULLISH SECURITY, BUY FUTURES :

Take the case of a speculator who has a view on the direction of the market. He would
like to trade based on this view. He believes that a particular security that trades at Rs.1000 is
undervalued and expect its price to go up in the next two-three months. How can he trade
based on this belief? In the absence of a deferral product, he would have to buy the security
and hold on to it. Assume he buys a 100 shares which cost him one lakh rupees. His hunch
proves correct and two months later the security closes at Rs.1010. He makes a profit of
Rs.1000 on an investment of Rs. 1,00,000 for a period of two months. This works out to an
annual return of 6 percent.
Today a speculator can take exactly the same position on the security by using futures
contracts. Let us see how this works. The security trades at Rs.1000 and the two-month
futures trades at 1006. Just for the sake of comparison, assume that the minimum contract
value is 1,00,000. He buys 100 security futures for which he pays a margin of Rs.20,000.
Two months later the security closes at 1010. On the day of expiration, the futures price
converges to the spot price and he makes a profit of Rs.400 on an investment of Rs.20,000.
This works out to an annual return of 12 percent. Because of the leverage they provide,
security futures form an attractive option for speculators.

SPECULATION: BEARISH SECURITY, SELL FUTURES :

Stock futures can be used by a speculator who believes that a particular security is over
-valued and is likely to see a fall in price. How can he trade based on his opinion? In the
absence of a deferral product, there wasn't much he could do to profit from his opinion.
Today all he needs to do is sell stock futures.

Let us understand how this works. Simple arbitrage ensures that futures on an individual
securities move correspondingly with the underlying security, as long asthere is suffici ent
liquidity in the market for the security. If the security price rises, so will the futures price. If
the security price falls, so will the futures price. Now take the case of the trader who expects
to see a fall in the price of ABC Ltd. He sells one two-month contract of futures on ABC at
Rs.240 (each contact for 100 underlying shares). He pays a small margin on the same. Two
months later, when the futures contract expires, ABC closes at 220. On the day of expiration,
the spot and the futures price converges. He has made a clean profit of Rs.20 per share. For
the one contract that he bought, this works out to be Rs.2000.

ARBITRAGE:OVERPRICED FUTURES:BUY SPOT, SELL FUTURES :

As we discussed earlier, the cost-of-carry ensures that the futures price stay in tune with the
spot price. Whenever the futures price deviates substantially from its fair value, arbitrage
opportunities arise. If you notice that futures on a security that you have been observing seem
overpriced, how can you cash in on this opportunity to earn riskless profits? Say for instance,
ABC Ltd. trades at Rs.1000. One-month ABC futures trade at Rs.1025 and seem overpriced.
As an arbitrageur, you can make riskless profit by entering into the following set of
transactions.
1. On day one, borrow funds, buy the security on the cash/spot market at 1000.
2. Simultaneously, sell the futures on the security at 1025.
3. Take delivery of the security purchased and hold the security for a month.
4. On the futures expiration date, the spot and the futures price converge. Now
unwind the position.
5. Say the security closes at Rs.1015. Sell the security.
6. Futures position expires with profit of Rs.10.
7. The result is a riskless profit of Rs.15 on the spot position and Rs.10 on the
futures position.
8. Return the borrowed funds.
When does it make sense to enter into this arbitrage? If your cost of borrowing funds to buy
the security is less than the arbitrage profit possible, it makes sense for you to arbitrage. This
is termed as cash-and-carry arbitrage. Remember however, that exploiting an arbitrage
opportunity involves trading on the spot and futures market. In the real world, one has to
build in the transactions costs into the arbitrage strategy.

ARBITRAGE: UNDERPRICED FUTURES: BUY FUTURES, SELL

SPOT :

Whenever the futures price deviates substantially from its fair value, arbitrage opportunities
arise. It could be the case that you notice the futures on a security you hold seem
underpriced. How can you cash in on this opportunity to earn riskless profits? Say for
instance, ABC Ltd. trades at Rs.1000. One-month ABC futures trade at Rs. 965 and seem
underpriced. As an arbitrageur, you can make riskless profit by entering into the following
set of transactions.
1. On day one, sell the security in the cash/spot market at 1000.
2. Make delivery of the security.
3. Simultaneously, buy the futures on the security at 965.
4. On the futures expiration date, the spot and the futures price converge. Now unwind the
position.
5. Say the security closes at Rs.975. Buy back the security.
6. The futures position expires with a profit of Rs.10.
7. The result is a riskless profit of Rs.25 on the spot position and Rs.10 on the futures
position.

If the returns you get by investing in riskless instruments is m ore than the return from the
arbitrage trades, it makes sense for you to arbitrage. This is termed as reverse-cash-and-carry
arbitrage. It is this arbitrage activity that ensures that the spot and futures prices stay in line
with the cost-of-carry. As we can see, exploiting arbitrage involves trading on the spot
market. As more and more players in the market develop the knowledge and skills to do
cash-and-carry and reverse cash-and-carry, we will see increased volumes and
Lower spreads in both the cash as well as the derivatives market.

PROBLEMS:

1. Consider A buys 5 lots of Rs 1050 in July, sells 3 lots of Rs.1090 in August, buys 5
lots of Rs.1075 in September, sells 3 lots of Rs.1085 in July and buys 5 lots of
Rs.1105 in August. Each lot has 200 shares. What is the net position at the end of
each month?
 ANSWERS:

Reliance – 200 shares per lot

July
Buys 5 lots @Rs.1050=5250+
Sells 3 lots @ Rs.1085=3255-
1995

In July there are 2 lots @ Rs.997.5

August
Buys 5 lots @Rs.1105=5525+
Sells 3 lots @ Rs.1090=3270-
2255

In Aug there are 2 lots @ Rs.1127.5

In September there are 5 lots @ Rs.1075

MONTH LOT SIZE LOT PRICE

July 2 Rs. 997.5
August 2 Rs.1127.5
September 5 Rs.1075

2. Consider A buys 5 lots on july at Rs.1070, buys 7 lots on August at Rs.1105,buys 5

lots on september at Rs.1125,sells 7 lots on July at Rs.1095,sells 5 lots on august at
Rs.1115,sells 5 lots on July at Rs.1075,sells 10 lots on September at Rs.1120. What is
the net position at the end of each month?

ANSWERS:

July
Buys 5 lots @Rs.1070 = 5350
Sells 7 lots @ Rs.1095 & Sells 5 lots @ Rs. 1075 =-(7665 +5375)= -13040
-7690

In July there are 5 lots @ Rs.1098.50 (buyback)

August
 Buys 7 lots @Rs.1105=7735+
Sells 5 lots @ Rs.1115=5575-
2160
In Aug there are 2 lots @ Rs.1080
September
Buys 5 lots @Rs.1125 = 5625+
Sells 10 lots @ Rs.1120=11200-
- 5575
In Sep there are 5 lots @ Rs.1115

MONTH LOT SIZE LOT PRICE

July 5 Rs.1098.50(buyback)
August 2 Rs.1080
September 5 Rs.1115

3. Consider A
Buys 5 lots at Rs.800 on 1.1.10
Sells 3 lots at Rs.820 on 7.1.10
Buys 5 lots at Rs.850 on 11.1.10
Sells 2 lots at Rs.830 on 18.1.10
Settlement price-Rs.830 and a lot contains 250 shares.

ANSWERS:
A’S BANK A/C

Dr. Cr.

1.1.10 5*250*800 = 1000000 7.1.10 3*250*820 = 615000

11.1.10 5*250*850 =1062500 18.1.10 2*250*830 = 41500

Balancing figure = 5000 29.1.10 5*250*830 = 1037500

Balan
cing figure = 5000

INFERENCE:
 A has bought 10 lots in total. He has sold about 5 lots. The excess of
the 5 lots is the opening position. It has it squared up. So the 5 shares are sold
during the last Thursday for Rs. 830 (the settlement price). Since every share is
squared up there is no need for the payment of margin.

ANSWER:

Loss = Rs. 5000

This amount would be debited from A’s A/C

4. Consider X
Buys 5 lots at Rs.1050 on 5.7.10
Buys 3 lots at Rs.1070 on 7.7.10
Sells 2 lots at Rs.1090 on 8.7.10
Sells 7 lots at Rs.1100 on 10.7.10
Sells 5 lots at Rs.1090 on 15.7.10.

ANSWERS:

A’s MARGIN A/C

Dr. Cr.

05.0 5*200*1050*20% = 210000 08.0 2*200*1050*20% = 84000

7 7
07.0 3*200*1070*20% = 128400 10.0 3*200*1050*20% = 126000
7 7
Balancing figure = 262000 10.0 3*200*1070*20% =128400
7
10.0 1*200*1100*20% = 44000
7
15.0 5*200*1090*20% = 218000
7

Balancing figure = 262000

INFERENCE:
 A margin is paid for every transaction (buying or selling). If the
settlement date is given then every transaction would be squared up so there is no
need for the payment of margin. If the settlement date is not given then margin
has to be paid for the opening position. Since margin is paid for every transaction,
it is debited from the A/C. If the transaction is squared up, the paid margin is
adjusted by crediting the respective amount. Thus the margin is paid only for the
opening position.

ANSWER:

Margin to be paid = Rs. 262000

5. consider margin – 20%,settlement price-Rs.1090 and each lot has 200 shares.
JUNE JULY
Buys 3 lots at Rs.1070
Buys 5 lots at Rs. 1050
Sells 3 lots at Rs.1090
Sells 3 lots at Rs. 1070
Sells 3 lots at Rs.1110

ANSWERS:

A’s BANK A/C ( JUNE)

Dr Cr.

5*200*1050 = 1050000

3*200*1070 = 642000 2*200*1090 = 436000

Balancing figure = 28000

INFERENCE:
 During the period of June A has bought 5 lots and sold 3 lots. At the
last Thursday of June, the settlement date is given as Rs. 1090. So A has to sell
the opening position lot of 2 for the settlement price.

ANSWER:

Profit = Rs. 28000

Rs. 28000 is credited to A’s A/C at the end of June.

A’s MARGIN A/C (JULY)

Dr. Cr.

3*200*1070*20% = 128400 3*200*1070*20% = 128400

3*200*1100*20% = 132000 Balancing figure = 132000

INFERENCE:

A has squared up its first 3 lots by buying and selling it. So it has to
pay the margin for the 3 lots which it has sold and not squared up, which is said to
be in the opening position.

ANSWER:

Margin to be paid = Rs. 132000

A’s BANK A/C

Dr Cr

July Margin = 133200 June Profit = 28000

Balancing figure = 105200

INFERENCE:

During July A’s A/C will be adjusted with the profit amount of June
and the margin to be paid in July. The balancing figure is then debited from A’s
A/C.

ANSWER:

Loss = Rs. 105200

The loss amount is debited from A’s bank A/C

6. TISCO FUTURES

01/06/10 A buys 1000 shares @ Rs. 505

03/06/10 A buys 3 lots @ Rs. 507

07/06/10 A sells 7 lots @ Rs. 510

12/06/10 A sells 3 lots @ Rs. 505

17/06/10 A buys 5 lots @ Rs. 495

The settlement price is Rs. 515

1 lot = 400 shares

A’s BANK A/C

Dr Cr

01/06 1000*505 = Profit = 23600

505000

Balancing figure = 481400

Dr, Cr.

03/03 3*400*507 = 608400 07/06 7*400*510 = 1428000

17/06 5*400*494 = 990000 12/06 3*400*505 = 606000

24/06 2*400*515 = 412000

Balancing figure = 23600

2034000 2034000
 INFERENCE:

The payment for the shares are debited from A’s A/C. The lots
which A bought has been squared up since the settlement price is given. The
profit which he has earned is adjusted with the debited amount and the remaining
amount is debited from A’s A/C.

ANSWER:

Profit from lots = Rs. 23600

Total loss = Rs. 481400

7. TISCO FUTURES

01/06/10 A buys 1000 shares @ 505

03/06/10 A buys 3 lots @ Rs. 507 Margin 20%

07/06/10 A sells 7 lots @ Rs. 510 Margin 15%

12/06/10 A sells 3 lots @ Rs. 505 Margin 25%

17/06/10 A buys 5 lots @ Rs. 495 Margin 20%

1 lot = 400

A’s MARGIN A/C

Dr Cr

03/06 3*400*507*20% = 121680 07/06 3*400*507*20% = 121680

07/06 4*400*510*15% = 122400 17/06 4*400*510*15% = 122400

12/06 3*400*505*25% = 151500 151500/3 = 50500

17/06 1*400*505*20% = 40400 Balancing figure = 101000

INFERENCE:

Every buy transaction is adjusted with the sell transaction and vice
versa. The margin amount is paid to the opening position since the settlement
price is not given.

ANSWER:

Margin to be paid = Rs. 10100

A’s BANK A/C

Dr Cr.

01/06 1000*505 = 505000

Balancing figure = 606000
17/06 Margin = 101000

INFERENCE:

As he had bought 1000 shares for Rs. 505, his A/C will be debited
with that amount Rs. 505000. He has to pay the margin, so that amount is also
debited. Thus the sum of both the amount would be debited from his bank A/C.

ANSWER:

Loss = Rs.60600

This amount will be debited from his A/C