WHAT IS FORWARD CONTRACTS?

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future dat
Over-the -counter instruments.
Forward contracts can be tailored to a specific commodity, amount, and delivery date.
While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a highe

WHAT IS FUTURES CONTRACT?

A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at
The only difference between forwards and futures is that they are traded on an exchnage unlike forward contracts.
This makes it free of counterparty risk.

FUTURES PAYOFF DIAGRAM

The value of a futures position at maturity is the difference between the delivery price and the underlying price (spot pric

Examples
Long/Short 50 DP
SP Short Payoff Long Payoff DP>SP Buy
0 50 -50 DP<SP Buy
10 40 -40
20 30 -30
30 20 -20 DP>SP Sell
40 10 -10 DP<SP Sell
50 0 0
60 -10 10
70 -20 20
80 -30 30
90 -40 40
Long Payoff
100 -50 50
110 -60 60 80

60

40

20

0
0 20 40 60
-20

-40
 40

20

0
0 20 40 60
-20

-40
WHAT ARE OPTION CONTRACTS?
An options contract is an agreement between two parties to-60facilitate a potential transaction on the underlying security at
Buying an option offers the right, but not the obligation to purchase or sell the underlying asset.
Eg: I enter into a options contract where I will buy 1 kg of gold after 3 months for 5000 Rs. If the price after 3 months is 600
But if the price is 4000 then I will not exercise the option instead will buy at the market price.
The seller however has the obligation to exercise the contract.

CALL OPTION
Stocks are not owned by the trader
Bob owns 100 shares which is currently priced at 20$ and Ed who doesn’t own any shares will enter into a call option cont
Ed will buy the 100 shares at 22$ per share after one month.
22 - 20 = 2$ per share is the premium
Total premium is 200$ for 100 shares
After one month is the price increases to 30$ then Ed will exercise the contract. That is, he will buy the shares for 22$ and
2200 3000
Profit 600 i.e = the price at which he sold - price at which he bought - premium
Now, after one month if the share prices decreased to 15$, he will not exercise the contract as he can buy the stocks at a l
But the premium has to be paid
Therefore loss for Ed = premium of 200$

PUT OPTION
 OPTIONS PAYOFF DIAGRAM
Option payoff diagrams are profit and loss charts that show the risk/reward profile of an option or combination of options
https://www.optiontradingtips.com/options101/payoff-diagrams.html
Summarizing Call & Put Options – Varsity by Zerodha
CALL
ITM: IN THE MONEY ITM Spot > Strike
OTM: OUT OF THE MONEY ATM Spot = Strike
ATM: AT THE MONEY OTM Spot < Strike

OPEN INTEREST
https://zerodha.com/varsity/chapter/open-interest/
Open Interest (OI) is a number that tells you how many futures (or Options) contracts are currently outstanding (open) in t
(VIEW SHEET 3)

MARGINS

INITIAL MARGIN: Initial Margin = % of Contract Value

VARIATION MARGIN: Variation margin refers to a margin payment made by a clearing member to a clearing

MARK TO MARKET P&L: https://zerodha.com/varsity/chapter/margin-m2m/

MARGIN CALL: A margin call occurs when a margin account runs low on funds, usually because of a l
Margin calls are demands for additional capital or securities to bring a margin accoun

FUTURES MARGIN: Margin required to open a future position

EXERCISE VS SQUARE OFF

When you take exactly opposite of your existing position, it is called squaring off.
Let's say, your existing position is BUY Call Option on Reliance. Now if you SELL Put Option on Reliance with same strike pri
You exercise an Option, when you want to take delivery of the underlying stocks, commodities or currency of the Option.

BLACK SCHOLES
A way of calculating theoretical prices for options.
Put in the following inputs in the financial calculator and calculate the price:
1. Spot Price
2. Strike Price
3. Time
4. Interest Rate: opportunity cost
5. Implied volatility
https://www.chittorgarh.com/article/options-pricing-models/281/ (Binomial and Black Scholes Model)

ANNUAL VOLATILITY
Standard Deviation * sqrt (no of days)

INTRINSIC VS TIME VALUE

Intrinsic value is a measure of an option's profitability based on the strike price versus the stock's price in the market.
Intrinsic Value can never be negative. If it s negative while calculating take it as 0.
Time value is based on the underlying asset's expected volatility and time until the option's expiration.
Time Value can be negative.
Option Premium = Time Value + Intrinsic Value

PUT CALL PARITY

No of put contract / No of call contract

OPTIONS GREEK
1. DELTA
Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. 
Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and neg
For options traders, delta also represents the hedge ratio for creating a delta-neutral position. 
For example if you purchase a standard American call option with a 0.40 delta, you will need to sell 40 shares of stock to b
Net delta for a portfolio of options can also be used to obtain the portfolio's hedge ration.

2. THETA
Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an o
Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal. 
For example, assume an investor is long an option with a theta of -0.50. The option's price would decrease by 50 cents eve
Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money.
Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta.
By comparison, an instrument whose value is not eroded by time, such as a stock, would have zero Theta.

3. GAMMA
Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. 
This is called second-order (second-derivative) price sensitivity. 
Gamma indicates the amount the delta would change given a $1 move in the underlying security. 
For example, assume an investor is long one call option on hypothetical stock XYZ. The call option has a delta of 0.50 and a
Therefore, if stock XYZ increases or decreases by $1, the call option's delta would increase or decrease by 0.10.
Gamma is higher for options that are at-the-money and lower for options that are in- and out-of-the-money, and accelera

4. VEGA
Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. This is the o
Vega indicates the amount an option's price changes given a 1% change in implied volatility.
For example, an option with a Vega of 0.10 indicates the option's value is expected to change by 10 cents if the implied vo

5. RHO
Rho (p) represents the rate of change between an option's value and a 1% change in the interest rate. This measures sens
For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call op
The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

OPTIONS CHAIN
https://www.investopedia.com/terms/o/optionchain.asp#:~:text=An%20options%20chain%2C%20also%20known,within%

SWAPS CONTRACT
A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financia
Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can b
Interest Rate Swaps.
Different kinds of
Currency Swaps. swaps
Commodity Swaps.

INTEREST RATE SWAPS

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another base
 Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or incre
marginally lower interest rate than would have been possible without the swap.

INTEREST RATE CAPS

An interest rate cap structure refers to the provisions governing interest rate increases on variable-rate credit products. A
interest rate can rise on variable-rate debt. Interest rate caps can be instituted across all types of variable rate products.
asset at a specified price on a future date.

d clearinghouse also gives rise to a higher degree of  default risk.

or security at a predetermined price at a specified time in the  future. 

chnage unlike forward contracts.

price and the underlying price (spot price) at the time of maturity.

Delivery Price (price we have set)

https://www.youtube.com/watch?v=SopFJAvoLsA

Loss Because we could have bought it for a lesser price

Profit Because we anticipated the price increase and hedged the risk and getting a smaller price than what is

Profit We are selling at a price that is greater than what is in the market
Loss Because we could have sold it at a higher price if we wouldn’t have entered into a contract

Long Payoff

40 60 80 100 120
 40 60 80 100 120

ransaction on the underlying security at a preset price, referred to as the strike price, prior to the expiration date.
erlying asset.
000 Rs. If the price after 3 months is 6000 I will exercise the option.

shares will enter into a call option contract with Bob.

at is, he will buy the shares for 22$ and sell it in the market for 30$

h he bought - premium
contract as he can buy the stocks at a lesser price in the market.
of an option or combination of options.

PUT In the money is a situation when exercising the option gives a profit
Spot < Strike Out of the money is the situation when exercising the option gives a loss
Spot = Strike At the money is when spot price and strike price are the same and there is no gain or loss
Spot > Strike

cts are currently outstanding (open) in the market.   Remember that there are always 2 sides to a trade – a buyer and a seller. 

1. Contract Value = Futures Price * Lot Size

made by a clearing member to a clearinghouse based on the price movements of futures contracts held by the clearing members.

ter/margin-m2m/

uns low on funds, usually because of a losing trade.

al or securities to bring a margin account up to the minimum maintenance margin.  

Option on Reliance with same strike price, lot size and expiry then you're squaring off your position.
ommodities or currency of the Option.
al and Black Scholes Model)

sus the stock's price in the market.

option's expiration.

e in the underlying asset's price. 
ption has a range between zero and negative one. 
al position. 
will need to sell 40 shares of stock to be fully hedged.

e sensitivity - sometimes known as an option's time decay.  

tion decreases, all else equal. 
's price would decrease by 50 cents every day that passes, all else being equal.
n- and out-of-the money.
will have positive Theta.
would have zero Theta.

lying asset's price. 

rlying security. 
The call option has a delta of 0.50 and a gamma of 0.10.
ncrease or decrease by 0.10.
in- and out-of-the-money, and accelerates in magnitude as expiration approaches. 

ng asset's implied volatility. This is the option's sensitivity to volatility.

to change by 10 cents if the implied volatility changes by 1%.

n the interest rate. This measures sensitivity to the interest rate.

rates rise by 1%, the value of the call option would increase to $1.30, all else being equal.
long times until expiration.

20chain%2C%20also%20known,within%20a%20given%20maturity%20period.

or liabilities from two different financial instruments.

or bond, although the instrument can be almost anything.

payments is exchanged for another based on a specified principal amount.

ng rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a

ases on variable-rate credit products. An interest rate cap is a limit on how high an

oss all types of variable rate products.
ch?v=SopFJAvoLsA

g a smaller price than what is prevaling

ed into a contract

Short Payoff
60

40

20

0
0 20 40 60 80 100 120
-20

-40

-60
20

0
0 20 40 60 80 100 120
-20

-40

-60

-80
and there is no gain or loss

a buyer and a seller. 

y the clearing members.

Monte Carlo Simulation

Monte Carlo simulation uses computerized modeling to predict outcomes. The model first generates a random number based
and time to expiration to generate a stock price. The generated stock price at the time of expiration is then used to calculate t
different set of random values from the probability functions. Depending upon the model, the number of uncertainties and th
thousands of recalculations before it is complete. For option models, Monte Carlo simulation typically relies on the average of
 MONDAY TUESDAY WEDNESDAY
NAME LONG SHORT CONTRACTS HELD LONG SHORT CONTRACTS HELD LONG
ARJUN 6L 6L 6L 3L
VARUN 4L 4L 4L 2L
NEHA 10S 10S 8L 2S 2L
JOHN 8S 8S
VIKRAM
O/S 10 10
 WEDNESDAY THURSDAY FRIDAY
SHORT CONTRACTS HELD LONG SHORT CONTRACTS HELD LONG SHORT
9L 10L 19L 10S
6L 5L 11L 10S
0 0
7S 15S 10L 5S
25S 25S 20L
15 30
FRIDAY
CONTRACTS HELD
9L
1L
0
5S
5S
10
 MARK TO MARKET

Assume on 1st Dec 2014 at around 11:30 AM;

you decide to buy Hindalco Futures at
Rs.165/-. The Lot size is 2000. 4 days later, on While marking to
4th Dec 2014, you decide to square off the market, the previous
position at 2:15 PM at Rs.170.10/-. Clearly, as day closing price is
the calculation below shows, this is a taken as the reference
profitable trade – rate to calculate the
profit or losses.

Buy Price = Rs.165

Sell Price = Rs.170.1
Profit per share = (170.1 – 165) = Rs.5.1/-
Total Profit = 2000 * 5.1 = = Rs.10,200/-
 Contract Value =
CLOSE OPEN CHANGE Closing Price*Lot
DATE EXPIRY DATE PRICE INTEREST IN OI Lot size size
24-Feb-21 25-Mar-21 15,037.55 62,14,200 16,61,025 75.00 1,127,816.25
25-Feb-21 25-Mar-21 15,169.50 95,93,400 33,79,200 75.00 1,137,712.50
26-Feb-21 25-Mar-21 14,578.45 1,08,70,350 12,76,950 75.00 1,093,383.75
1-Mar-21 25-Mar-21 14,797.75 98,07,375 -10,62,975 75.00 1,109,831.25
2-Mar-21 25-Mar-21 14,958.15 1,01,89,875 3,82,500 75.00 1,121,861.25
3-Mar-21 25-Mar-21 15,298.85 1,02,87,525 97,650 75.00 1,147,413.75
4-Mar-21 25-Mar-21 15,106.25 1,23,60,825 20,73,300 75.00 1,132,968.75
5-Mar-21 25-Mar-21 14,953.05 1,28,42,250 4,81,425 75.00 1,121,478.75
8-Mar-21 25-Mar-21 14,969.00 1,28,58,975 16,725 75.00 1,122,675.00
9-Mar-21 25-Mar-21 15,134.75 1,15,84,575 -12,74,400 75.00 1,135,106.25
10-Mar-21 25-Mar-21 15,209.30 1,11,79,200 -4,05,375 75.00 1,140,697.50
12-Mar-21 25-Mar-21 15,051.40 1,14,70,275 2,91,075 75.00 1,128,855.00
15-Mar-21 25-Mar-21 14,968.75 1,11,92,250 -2,78,025 75.00 1,122,656.25
16-Mar-21 25-Mar-21 14,959.70 1,05,29,175 -6,63,075 75.00 1,121,977.50
17-Mar-21 25-Mar-21 14,771.30 98,06,775 -7,22,400 75.00 1,107,847.50
18-Mar-21 25-Mar-21 14,577.05 94,61,325 -3,45,450 75.00 1,093,278.75
19-Mar-21 25-Mar-21 14,756.45 87,81,600 -6,79,725 75.00 1,106,733.75
22-Mar-21 25-Mar-21 14,741.60 79,96,950 -7,84,650 75.00 1,105,620.00
23-Mar-21 25-Mar-21 14,832.90 58,06,125 -21,90,825 75.00 1,112,467.50
24-Mar-21 25-Mar-21 14,555.30 45,03,450 -13,02,675 75.00 1,091,647.50

Q1. NIFTY INDEX @ 14850 Initial Margin 15% 1 Lot 75 Shares

Scenario I Buy Future @ 14850

Scenario II Sell Future @ 14850

Assuming Margin is 15%

a) Calculate Mark to Market Profit and Loss

b) If the total loss is less than 60% of the margin amount, then calculate the variation margin ?

c) Draw a pay-off diagram for both the positions

For the first day the M2M is contract value - initital contract value ( which is the fututres pri
Next day onwards it is based on the previous day
 M2M = Contract Cash
Margin Requirement = Value - Initial Cash Balance = Initial Balance/Initial
15%*Contract value Contract value Margin + M2M P&L Margin
169,172.44 14,066.25 181,128.75 14,066.25 1.08419753086
170,656.88 9,896.25 191,025.00 23,962.50 1.14343434343
164,007.56 -44,328.75 146,696.25 -20,366.25 0.87809203143
166,474.69 16,447.50 163,143.75 -3,918.75 0.97654320988
168,279.19 12,030.00 175,173.75 8,111.25 1.04855218855
172,112.06 25,552.50 200,726.25 33,663.75 1.20150392817
169,945.31 -14,445.00 186,281.25 19,218.75 1.11503928171
168,221.81 -11,490.00 174,791.25 7,728.75 1.04626262626
168,401.25 1,196.25 175,987.50 8,925.00 1.05342312009
170,265.94 12,431.25 188,418.75 21,356.25 1.1278338945
171,104.63 5,591.25 194,010.00 26,947.50 1.16130190797
169,328.25 -11,842.50 182,167.50 15,105.00 1.09041526375
168,398.44 -6,198.75 175,968.75 8,906.25 1.05331088664
168,296.63 -678.75 175,290.00 8,227.50 1.04924803591
166,177.13 -14,130.00 161,160.00 -5,902.50 0.96466891134
163,991.81 -14,568.75 146,591.25 -20,471.25 0.87746352413
166,010.06 13,455.00 160,046.25 -7,016.25 0.95800224467
165,843.00 -1,113.75 158,932.50 -8,130.00 0.951335578
166,870.13 6,847.50 165,780.00 -1,282.50 0.99232323232
163,747.13 -20,820.00 144,960.00 -22,102.50 0.86769921437

Initial Contract Value = Futures prices*Lot size 1113750

Initial Margin = % of contract value 167062.5
Variation margin 100237.5

3M P & L = sum of M2M -22,102.50

ate the variation margin ? 2M

2M

( which is the fututres price one)