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Present by:
Saif Adnaan
Sohrab Ali Choudhary
Priyanka Anand
Sanket Garg
In the financial marketplace some instruments are
regarded as fundamentals, while others are regarded
as derivatives.

Financial Marketplace

Derivatives Fundamentals
Stocks Bonds
Swaps Forwards

What Is A Futures Contract?

Anagreement between a buyer and a seller to receive or deliver a product on a

future date at a price they have negotiated TODAY.

Example of Futures Contracts

An oil producer needs to sell their oil. They may use futures contracts
do it. This way they can lock in a price they will sell at, and then deliver
the oil to the buyer when the futures contract expires. Similarly, a
manufacturing company may need oil for making widgets. Since they
like to plan ahead and always have oil coming in each month, they
too may use futures contracts. This way they know in advance the
price they will pay for oil (the futures contract price) and they know
they will be taking delivery of the oil once the contract expires.
Two main kinds of Futures
• Commodity Futures
• Financial Futures

• Private contracts between two parties • Traded on an exchange
• Not standardize • Standardize contract
• Usually are one specific deliver date • Range of delivery dates
• Settle at end of contract • Settled daily
• Delivery or final cash settlement takes • Contract is usually close out prior to
place Maturity.
• Some credit risk exist • No credit risk
• Clearing house of the exchange
guarantee payments to both parties
Characteristics of Futures contract

 The futures price is simply what a buyer is willing to pay and a seller is
willing to accept for a product.
 Transaction will not be completed until some agreed-upon date in the
 Seller has legally binding obligation to make delivery on specified date.
 Buyer/holder has legally binding obligation to take delivery on specified
 Futures may be held until delivery date or traded on futures market.
 All trading is done on a margin basis.
• Hedger are in the position where
Using Future they eliminate risk associated with the
price of an asset . They use
contract by derivative to reduce / eliminate risk
Hedger • Example : Farmers will sell futures
to guarantee the price at which
they will be able to sell their wheat

• Speculator wish to bet on future

movement in the price of anasset
Using Future • They use derivative to get extra
Contract by leverage – high return
Speculators • External events that affect price
movement or apply historical price
movement patterns
Each Exchange has a clearinghouse

Clearing house guarantees that traders in the

future market will honor their obligations

It acts as the buyer to every seller and theseller

to every buyer

Traders can easily reverse their positions from

long to short at future date
Trading cycle
 Futures contracts have a maximum of 3-month trading cycle -
the near month (one), the next month (two) and the far
month (three). New contracts are introduced on the trading
day following the expiry of the near month contracts. The
new contracts are introduced for a three month duration. This
way, at any point in time, there will be 3 contracts available
for trading in the market (for each security) i.e., one near
month, one mid month and one far month duration

 Futures contracts expire on the last Thursday of the expiry

month. If the last Thursday is a trading holiday, the contracts
expire on the previous trading day.
Margin Requirements

Futures exchanges require good faith money from

counter-parties to futures contracts, to act as a
guarantee that each will abide by the terms of the

This money is called margin.

Each futures exchange is responsible for setting the

minimum initial margin requirements for their futures

The balance in the margin account is adjusted to

reflect the daily settlement