Final

SWAYAM SIDDHI COLLAGE OF MANAGEMENT AND RESEARCH
Future, as the name indicates, is a trade whose

settlement is going to take place in the future. However, before we take a look at futures, it will be beneficial for us to take a look at forward rate agreements
A forward rate agreement is one in which a buyer and

a seller enter into a
contract at a specified quantity of an asset at a

specified price on a specified
date.
There are two kinds of futures traded in the

market- index futures and stock futures. There are three types of futures, based on the tenure. They are 1, 2 or 3 month future. They are also known as near and far futures depending on the tenure.
Spot Price: The current market price of the scrip/index Future Price: The price at which the futures contract trades in the futures market Tenure: The period for which the future is traded Expiry date: The date on which the futures contract will be
settlec
Basis : The difference between the spot price and the future price
Future price is nothing but the current market price plus the interest cost for the tenure of the future. This interest cost of the future is called as cost of carry. If F is the future price, S is the spot price and C is the cost of carry or opportunity cost, then F=S+C F = S + Interest cost, since cost of carry for a finance is the interest cost Thus, F=S (1+r)T Where r is the rate of interest and T is the tenure of the futures contract.
Futures

Commodity Financial (Stock index, interest rate & currency )
Long
- this is when a person buys a futures contract, and agrees to receive delivery at a future date. Eg: Virus position Short - this is when a person sells a futures contract, and agrees to make delivery. Eg: Jays Position
Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2012
11
Available
on a wide range of assets Exchange traded Specifications need to be defined:

What can be delivered, Where it can be delivered, & When it can be delivered
Settled
daily
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Futures Price Spot Price Futures Price
Spot Price
Time
Time
(a)
(b)
13
margin is cash or marketable securities deposited by an investor with his or her broker The balance in the margin account is adjusted to reflect daily settlement Margins minimize the possibility of a loss through a default on a contract
14
If
a futures contract is not closed out before maturity, it is usually settled by delivering the assets underlying the contract. When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses. A few contracts (for example, those on stock indices and Eurodollars) are settled in cash
15
foreign currency is analogous to a security providing a yield The yield is the foreign risk-free interest rate It follows that if rf is the foreign risk-free interest rate
F0 S0 e
( r rf ) T
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1000 units of foreign currency (time zero)
1000e f units of foreign currency at time T
r T
1000S0 dollars at time zero
1000F0 e f dollars at time T
r T
1000S0erT dollars at time T
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F0 S0 e(r+u )T where u is the storage cost per unit time as a percent of the asset value. Alternatively,
F0 (S0+U )erT where U is the present value of the storage costs.
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The
cost of carry, c, is the storage cost plus the interest costs less the income earned For an investment asset F0 = S0ecT For a consumption asset F0 S0ecT The convenience yield on the consumption asset, y, is defined so that F0 = S0 e(cy )T
19
Suppose k is the expected return required by investors in an asset We can invest F0er T at the risk-free rate and enter into a long futures contract to create a cash inflow of ST at maturity This shows that
F0 e rT e kT E ( ST ) or F0 E ( ST )e ( r k )T
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No Systematic Risk Positive Systematic Risk Negative Systematic Risk
k=r k>r k<r
F0 = E(ST) F0 < E(ST) F0 > E(ST)
Positive systematic risk: stock indices Negative systematic risk: gold (at least for some periods)
21
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Defines:

the period of time to which the interest rate applies The period of time used to calculate accrued interest (relevant when the instrument is bought of sold
23
Treasury Bonds:
Actual/Actual (in period)
Corporate Bonds: 30/360

Money Market Instruments: Actual/360
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Bond:
8% Actual/ Actual in period.
4% is earned between coupon payment dates. Accruals on an Actual basis. When coupons are paid on March 1 and Sept 1, how much interest is earned between March 1 and April 1?
Bond:
8% 30/360
Assumes 30 days per month and 360 days per year. When coupons are paid on March 1 and Sept 1, how much interest is earned between March 1 and April 1?
25
T-Bill:
8% Actual/360:
8% is earned in 360 days. Accrual calculated by dividing the actual number of days in the period by 360. How much interest is earned between March 1 and April 1?
26
How
many days of interest are earned between February 28, 2013 and March 1, 2013 when

day count is Actual/Actual in period? day count is 30/360?
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360 P (100 Y ) n Y is cash price per $100 P is quoted price
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Cash price = Quoted price + Accrued Interest
29
Cash price received by party with short position = Most recent settlement price Conversion factor + Accrued interest
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SWAYAM SIDDHI COLLAGE OF MANAGEMENT AND RESEARCH

Future, as the name indicates, is a trade whose

A forward rate agreement is one in which a buyer and

contract at a specified quantity of an asset at a

There are two kinds of futures traded in the

Commodity Financial (Stock index, interest rate & currency )

on a wide range of assets Exchange traded Specifications need to be defined:

Futures Price Spot Price Futures Price

1000 units of foreign currency (time zero)

1000e f units of foreign currency at time T

1000S0 dollars at time zero

1000F0 e f dollars at time T

1000S0erT dollars at time T

F0 (S0+U )erT where U is the present value of the storage costs.

No Systematic Risk Positive Systematic Risk Negative Systematic Risk

k=r k>r k<r

F0 = E(ST) F0 < E(ST) F0 > E(ST)

Actual/Actual (in period)

Corporate Bonds: 30/360

8% Actual/ Actual in period.

day count is Actual/Actual in period? day count is 30/360?

360 P (100 Y ) n Y is cash price per $100 P is quoted price

Cash price = Quoted price + Accrued Interest

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