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    FMP Mechanics of Futures SSEI

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    DIVYANSHU GUPTA
    Futures contracts are exchange-traded forward commitments to buy or sell an asset at a predetermined price on a future date. Unlike over-the-counter forwards, futures are standardized and traded on an exchange. Margin requirements are used to mitigate counterparty risk, with initial margin deposited upfront and variation margin ensuring balances stay above maintenance levels. The cost of carry model relates the futures price to the expected spot price based on interest rates, storage costs, convenience yield, and other factors.

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    FMP Mechanics of Futures SSEI

    Uploaded by

    DIVYANSHU GUPTA
    27 views1 page
    Futures contracts are exchange-traded forward commitments to buy or sell an asset at a predetermined price on a future date. Unlike over-the-counter forwards, futures are standardized and traded on an exchange. Margin requirements are used to mitigate counterparty risk, with initial margin deposited upfront and variation margin ensuring balances stay above maintenance levels. The cost of carry model relates the futures price to the expected spot price based on interest rates, storage costs, convenience yield, and other factors.

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    Futures contracts are exchange-traded forward commitments to buy or sell an asset at a predetermined price on a future date. Unlike over-the-counter forwards, futures are standardized and traded on an exchange. Margin requirements are used to mitigate counterparty risk, with initial margin deposited upfront and variation margin ensuring balances stay above maintenance levels. The cost of carry model relates the futures price to the expected spot price based on interest rates, storage costs, convenience yield, and other factors.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    27 views1 page

    FMP Mechanics of Futures SSEI

    Uploaded by

    DIVYANSHU GUPTA
    Futures contracts are exchange-traded forward commitments to buy or sell an asset at a predetermined price on a future date. Unlike over-the-counter forwards, futures are standardized and traded on an exchange. Margin requirements are used to mitigate counterparty risk, with initial margin deposited upfront and variation margin ensuring balances stay above maintenance levels. The cost of carry model relates the futures price to the expected spot price based on interest rates, storage costs, convenience yield, and other factors.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    MECHANICS OF FUTURES

    Both Forwards & Futures belong to category of-“ FORWARD COMMITMENTS”-both sided betting.

    Def-Contract to buy/sell a commodity at an agreed upon price at a later date.

    Similar to F/W Contract except that it is exchange-traded. Diff btw the two same as btw OTC & Exchange Traded.

    TERM STRUCTURE OF FUTURES PRICE


    Margin Req:- Changes made in OTC Mkt
    post 2008 crisis- CASE I-F(3)>(F2)>F(1)>S -CONTANGO/NO
    Trader---------Broker---------Member-------Clearing C/SHORT SHD DELIVER AT BEG. OF DELIVERY
    House Bilateral CCP
    Settlement- Settlement PERIOD
    ISDA,NETTING, Margin –(A)
    (A) (B) COLLATERALIZATION CASE I-F(3)<(F2)<F(1)<S-
    Deposit Initial Margin. Only Initial Margin With/without BACKWARDATION/VERY HIGH C/SHORT SHD
    Change in price reflects (CLEARING MARGIN) Threshold DELIVER AT END OF DELIVERY PERIOD
    in Margin.When margin ON NET
    balance falls below LONG/SHORT RULE OF CONVERGENCE- F=S ON MATURITY
    Maintenance POSITION IN Standardization in Futures BASIS=S-F (+VE IN BACKWARDATION ,-VE IN
    Margin,there is a CONTRACT.
    margin call & trader CONTANGO)(Shift can take place from contango to
     Asset Quality backwardation & vice versa)
    brings back margin
     Contract Size
    balance back to Initial-
     Delivery Arrangement F+ Backwardation +ve Roll Yield
    Margin brought back is Contango -ve Roll Yield
     Delivery Period
    known as Variation
     Price Limit & Position
    Margin. F- Backwardation -ve Roll Yield
    Limit
    Contango +ve Roll Yield
    (Choice always enjoyed
    COST OF CARRY MODEL by short (F-),hence its F>E(S)=Normal Contango
    futures price lower ) F<E(s)=Normal Backwardation
    F = Se ^ ((r + u -y-c) x t)
    INTEREST ON MARGIN
    Where
    r=Risk free rate INITIAL MARGIN VARIATION MARGIN
    u=Storage Cost
    FUTURES CASH-INT RECD NO INTEREST
    y=Monetary benefit SECURITIES(MARGIN WITH
    HAIRCUT)-NO INTEREST
    c=Convenience Yield
    Consumption Asset-Does not have y except gold
    Investment Asset-Does not have u & c F/W CASH-INT RECD CASH-INT RECD (because daily settlement
    SECURITIES(MARGIN WITH does not take place as against Futures).
    HAIRCUT)-NO INTEREST

    Relationship btw Futures Price & Fwd Price(When F is +vely correlated to Int Rate,one would choose Long Futures over Long F/W)

    DETERMINISTIC(PREDICTABLE) STOCHASTIC(UNPREDICTABLE)

    FUTURES PRICE=F/W PRICE

    Int Rate +vely correlated to Int Rate -vely correlated to F


    F

    Futures Price> FWD Price Futures Price< FWD Price (Eg


    Eurodollar Futures)

    Page 18

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